New landlord tax rules for new debt only

by Mark Alexander

10:54 AM, 23rd July 2015
About 4 years ago

New landlord tax rules for new debt only

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New landlord tax rules for new debt only

Those of us who are lobbying for an amendment to the budget need to have a very clear message.

I propose that message is “new tax rules for new debt only”

Let us be absolutely clear; Government and the Bank of England have recognised a need to reduce growth in the buy-to-let market. It is highly unlikely they would knowingly risk the decimation of an industry and all of the knock on consequences. At the moment they are swinging a sledge hammer at a nut. The consequences of the sledge hammer striking that nut is obliteration which serves no purpose. This needs to be made clear.

To help you to comprehend the consequences of the Budget proposals being implemented as proposed you need to have a clear understanding of the impact on your personal finances.

Will your tax be more than your profit?

Before the Summer 2015 Budget it was unthinkable that a UK Government could charge anybody more tax than they are making in profit. However, that is entirely possible under the Budget proposals. Indeed, in the case issued by HMRC as an example, the extra tax payable by that landlord will be equal to all of his rental profit, plus 50%. Tax Levy on Landlords

But how will the Summer Budget affect your personal finances? If the total of your gross income and your BTL finance costs is more than £43,000 then you will pay more tax.  Perhaps more to the point, what are you going to do about it?

A think tank of numerically talented Property118 members has pored over a spreadsheet created by Alex Caravello of Milton Keynes Landlords Association and given the numbers the thumbs up. The spreadsheet allows you to calculate the REAL effects of the Tax Levy for your own circumstances. Let’s be clear, this is a tax levy despite the Government spin doctors calling it an amendment to “tax relief”. Some have gone as far as to call it a ‘confiscation of assets proposal’

To download the spreadsheet, in order to see for yourself how you will be personally affected, please CLICK HERE.

We urge you to then to make an appointment with your local MP to show him/her your calculations. If you are not confident with spreadsheets or your tax returns please ask your accountant to complete it for you. If you have other professional advisers such as a mortgage broker, a solicitor or a letting agent then show the results to them too. Perhaps even show your tenants and explain that all landlords are in a similar position and will need to increase rents to pay these tax levies if they are implemented. The more people we can disturb the better.

If we are to stand any chance of getting these Budget proposals amended there needs to be a massive public outcry.

If you are a talented letter writer please consider further lobbying, e.g. to the Bank of England (head office and local representatives), George Osborne and even the Prime Minister. Some great examples of letters already sent can be found HERE.

It will not only be landlords who are affected if these proposals proceed as planned. If landlords face bankruptcy and there is a fire sale of tenanted property resulting in property prices crashing more homeowners could be trapped in negative equity, particularly those first time buyers who have managed to get onto the housing ladder in recent years. The tenants of the sold or repossessed properties would be evicted, and rents for the remaining properties would rise. I doubt any sane Government would want that.

Economics and common sense will prevail …. eventually …. but it is imperative that every reader of this article takes action now and completes the suggested tasks above if we are to stand any chance of common sense prevailing before it is too late.

The key message we must get across to the influencers of this decision (Government and the Bank of England) is as follows ….

“NEW TAX RULES FOR NEW DEBT ONLY”

Please share this article via Social Media and encourage all landlords you know to read it and to download the spreadsheet.

Just in case you haven’t done so already, please CLICK HERE to download the spreadsheet and then re-read this article to remind yourself of what to do next.



Comments

Dr Rosalind Beck

0:01 AM, 26th July 2015
About 4 years ago

Reply to the comment left by "Abdul Choudhury" at "25/07/2015 - 17:31":

Hi Abdul. Why not contact your MP about this? I think the personal stories are the best and might be the most effective in persuading people with power how bad this is.

Colin Hardwick

10:28 AM, 26th July 2015
About 4 years ago

If I look at the proposed changes, I read this:

"This measure will have effect for finance costs incurred on or after 6 April 2017"

The key word is "INCURRED" - I read this as meaning debt taken out after 6 April 2017.......but looking at it again it could mean costs being paid after 6 April 2017.

michael fickling

11:19 AM, 26th July 2015
About 4 years ago

Abdul i can empathise completely with that and there will be a few thousand more like yourself who are paying under various maintenance formulas..both to ex partners and for children.Just another example of why this ill considered and completely new tax on "turnover" effect..must be challenged all the way. Keep strong.

Barry Fitzpatrick

11:38 AM, 26th July 2015
About 4 years ago

Interesting article by Richard Blanco, London Representative for the National Landlords Association, NLA:
http://www.richardblanco.com/buy-to-let-is-a-business-not-an-investment/

Economists at the Institute for Fiscal Studies, IFS, said: “There is a big problem in the property market making it difficult for young people to buy, and pushing up rents. The problem is a lack of supply. This change will not solve that problem.”

Jennet Siebris, the head of residential research at the property group CBRE, agreed that this policy will cause landlords to pass the increase in tax on to their tenants in their monthly rent.

Appalled Landlord

13:07 PM, 26th July 2015
About 4 years ago

Reply to the comment left by "Colin Hardwick" at "26/07/2015 - 10:28":

Hi Colin

If the levy on fiancé costs was only intended to apply to new debt taken out after 5 April 2017 there would be no need to phase it in evenly over the following 4 years.

I doubt that people will borrow to buy property in their own names after 5 April 2017 and thus volunteer for the levy if becomes law. In fact this announcement is enough to stop people doing so now.

Dr Monty Drawbridge

13:11 PM, 26th July 2015
About 4 years ago

Reply to the comment left by "Appalled Landlord" at "26/07/2015 - 13:07":

What?! There's a levy on fiancé costs too?! When is the bad news going to end? I'm going to have to have sit down and a chat with my girlfriend tonight...

michael fickling

13:53 PM, 26th July 2015
About 4 years ago

Greatest Impact...point for submissions..im ...advised.

Is..reachable..a......tWWW.parliament.uk

Ref
Finance Bill 2015/16

WHICH IS GOING TO CONSIDER... THIS BILL..Written submissions must be sent to reach them before 8th September...when consideration of the bill commences.

Appalled Landlord

13:57 PM, 26th July 2015
About 4 years ago

Reply to the comment left by "Dr Monty Drawbridge " at "26/07/2015 - 13:11":

Hi Monty

That was Word’s auto correct. It didn’t underline to show I’d omitted an “n”, it just slipped an accent on. I don’t even know how to put on accent on letters. When I saw it I thought it was a mark on the screen!

Lynne Davis

22:17 PM, 26th July 2015
About 4 years ago

Email sent (via writetothem.com) to the MPs for every constituency in which we have rental property:

Dear ******,

I wish to express my grave concerns over the proposed changes to tax for buy-to-let landlords.

I can understand the removal of the 10% wear and tear allowance for furnished property and have no objections to that change. I also appreciate that the buy-to-let market may need to be suppressed to some degree. However, it has been brought to my attention that the changes to mortgage interest relief are in reality much more drastic than they appeared at first glance, and this is where my concerns lie. My initial belief was that, as a basic rate tax payer, I would not be affected by the changes, but in fact it appears that this is far from the case.

As you are no doubt aware, there is a shortage of social housing through the country and much of the slack is taken up by BTL landlords, most of whom - such as my husband and myself - have scrimped and saved to make provision for our own retirement by providing a much-needed service. Over the last nine years, with the help of buy-to-let mortgages, we have built up a small portfolio of rental properties in Birmingham and Solihull, including your constituency. We pride ourselves on providing good-quality accommodation and looking after our tenants well, and although some of them have been in their homes for a number of years, we have yet to increase the rent during a tenancy. Our tenants all either rent as a lifestyle choice or would not be in a position to buy their own homes even if prices were much lower than they are now.

I have been led to understand that, once the new rules come in, the cost of mortgage interest will no longer be offsettable against rental income; instead we will be taxed on the full amount of rental income (less maintenance costs) and only after that will we receive tax relief - at basic rate - on the cost of mortgage interest.

An illustrative example, not too far adrift of my own situation:
Rental income (after maintenance costs): £25,000
Mortgage interest payments: £20,000
Actual profit: £5,000
Under current rules, tax would be paid on the £5,000 profit. At basic rate (i.e. assuming that the landlord's income from other sources neither falls below the £10,600 income tax threshold nor exceeds approx. £35K) this would mean tax of £1,000 payable on rental profits.

Under the new rules, the deemed taxable profit would be the full £25,000. If the landlord in question had other income, this would be likely to push them into the higher-rate tax bracket; a gross wage of under £18,000 would be sufficient to do this. Hence the rental income would result in a tax bill of anything between £5,000 and £10,000. 20% tax relief (£4,000) would be claimable on mortgage interest payments, but that would still leave a tax bill of up to £6,000 on rental profits of just £5,000.

That’s right, the tax bill could EXCEED the actual net profit.

If interest rates were to rise (as we know must happen before too long), this would make the effect of the changes even more pronounced.

The vast majority of responsible landlords have built their rental businesses up over a period of years, even several decades, with the dual aims of providing a needed service and providing for themselves in old age rather than becoming a burden on the State as a result of indulging in a spendthrift lifestyle. Any established landlord knows that providing rental accommodation is a business with responsibilities, not just a passive investment, even though HMRC does not acknowledge this.

What other business is taxed on its turnover rather than its profits?

These draconian measures are likely to drive a large number of responsible landlords out of the BTL market. Prices may fall as a result, and no doubt a few more first-time buyers will be able to get onto the property ladder (subject to meeting mortgage lenders' requirements - not an easy feat these days!). However, there are many who will never be in a position to buy, and many others who would prefer to rent for their own reasons, and these are the people who will suffer through being unable to find rental accommodation that meets their needs. In addition, an increased proportion of the landlords left in the market will be the disreputable ones: criminals who evade their responsibilities and paying tax and so will be largely unaffected by the new rules.

It is unfair to move the goalposts in this way, penalising landlords for acting in a financially responsible manner. If tax reliefs have to be limited then this should only be done for property purchases made AFTER the new rules come in.

I hope you will agree that the proposed measures should at the very least be tempered, and will vote accordingly.

Appalled Landlord

23:04 PM, 26th July 2015
About 4 years ago

Reply to the comment left by "Lynne Davis" at "26/07/2015 - 22:17":

Hi Lynne

That is an excellent letter!

However, the example of other income that you chose is too low. A wage of £18,000 would not have a significant effect. If you put your figures in the Calculator part of the spreadsheet, you will see that the extra tax due to the proposed change is only £123.

If the wage were £32,385, the extra tax on £5,000 profit would be £3,000. This would be on top of the 20%, or £1,000, that you would pay today, making £4,000 altogether.

If the wage were £42,385, the extra tax on £5,000 profit would be £4,000. This would be on top of the 40%, or £2,000, that you would pay today, making £6,000 altogether.

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