Only 1 BTL  and HMRC Tax me out of business!

by Readers Question

11:12 AM, 6th August 2015
About 3 years ago

Only 1 BTL and HMRC Tax me out of business!

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Only 1 BTL  and HMRC Tax me out of business!

This is direct from Megan Shaw Product Owner HMRC, contact details are on the bottom so this can be confirmed very quickly should you feel it is incorrect.one

Observations from this very simple example below we can see that :

1. A 20% tax rate payer is pushed into the 40% band with the new proposals
2. The taxable property profit Of £1,200 will be deemed by HMRC to be £12,000
3. The “real profit” of £1200 was initially taxed @20% making tax due £240
4. The tax payable increases by £1800 making a total of £2040
5. The tax liability completely wipes out the profit and leaves a further liability of £840.  6. In percentage terms £2,040/£1,200 x 100 is 170%, the effective rate at which tax will be paid.
7. This simple model is no longer viable, the landlord must sell up, pay down borrowings or increase rent.

Example:

  • Prop rental income is £15,300, or £1,275 pcm (a 3, 4 or 5 bed HMO maybe depending on location)
  • Prop Val £275K
  • Expenses: 10% agent fees (£1,530) and a few repairs, gas safe, insurance etc =£3,300
  • Finance on a loan of £216k (78.5%LTV) @ 5% = £10,800
  • Net profit £1,200

These figures are very realistic and common place for individual Landlords, this example represents a large number of landlord positions.

If the landlord had a second property, also with a profit of £1,200, his tax in 2020/21 would go up by £2,640 compared to his liability if he only had one. The effective tax rate on this second property would be £2,640/£1,200 x 100, or 220% of the rent.

Under the current system this landlord would have remained a basic rate taxpayer even with 2 properties. Under the proposed system he will very much be a higher rate taxpayer.

After April 2020 (when the restriction will be fully implemented) landlords who incur interest (and other associated finance costs) on residential properties that they let will need to calculate their tax differently. You will no longer be able to deduct interest from your rental income to arrive at your taxable profits, you will instead receive a reduction from your income tax liability equivalent to 20% of those interest costs. If that means you become a higher rate taxpayer (or you were anyway) then you will have to pay more tax as a result of this change.

Please see the example below. This comparison is designed to show the effect of the change, not to calculate someone’s exact tax liability. The tax bands were rounded off for simplicity, and applied to both years so as not to confuse the result of the calculation.

Before restriction 2016-17 £ After restriction 2020-21 £
Salary 40,000 Salary 40,000
 Property income 15,300  Property income 15,300
 Less Other costs (3,300)  Less Other costs (3,300)
 Less Finance costs (10,800)  Less Fin costs (0)
 Property profits 1,200  Property profits 12,000
 Taxable income 41,200  Taxable Income 52,000
 Less Personal Allowance (11,000)  Less Personal Allowance(11,000)
 Tax due on 30,200  Tax due on 41,000
 Tax at 40% 3,600
Tax @ 20% 6,040 Tax @ 20% 6,400
Total Tax 6,040 Total Tax 10,000
Less Finance Costs @ 20% (2,160)
Final Tax 6,040 Final Tax 7,840

Please do get in touch if that doesn’t clarify the mechanism.
The Bill is subject to parliamentary scrutiny and so there are no guarantees as to what will become law before the Bill receives Royal Assent in Autumn.
Megan Shaw
Product Owner – Property Income & REITs
HMRC, Room 3/64, 100 Parliament Street, London, SW1A 2BQ
03000 585628

Related articles – LINK

http://www.property118.com/category/budget-2015-campaign/

Join The Landlord Tax Levy Campaign Group

YOUR Money, YOUR future, YOUR choice.


Comments

Appalled Landlord

12:24 PM, 7th August 2015
About 3 years ago

HMRC stated that the policy objective is to “ensure that landlords with higher incomes no longer receive the most generous tax treatment”. But the effect of the change will also be felt by people who currently pay tax at the lowest rate, as the example shows.

This landlord is a basic rate payer today, but the change in the treatment of finance costs will turn him into a higher rate payer and make him poorer.

He will have to pay the excess of the rental tax over the real rental profit out of what is left of his salary after PAYE and NI have been deducted from it.

This landlord will have to increase the rent by 20% over the next 5 years if he can, passing the tax increase on to the tenants. Otherwise he will have to sell his property.

HMRC stated that “It is expected that 1 in 5 individual landlords will receive less relief as a result of this measure”. The fact is that any landlord will be affected if his total income, plus interest (and other finance costs), exceeds £43,000.

Adebowale Ajao

13:02 PM, 7th August 2015
About 3 years ago

I dont understand the after restrictions calculations. 40% tax on £41000 will be £16400. except you are saying that a certain portion of the 41K will be taxed at 40% and another portion at 20% etc.
From your calculations however, it makes BTL not worth the hassle and my feeling is that one of two things may happen. either landlords sell off their properties with few properties in the market to rent but lots to buy. it may then turn into a buyers market with either cheaper or expensive mortgages. hard to tell how the market will respond to that. I hope it does not get passed into law.

Trendo

14:56 PM, 7th August 2015
About 3 years ago

Tax bill due to 1 property before £240
Tax bill due to 1 property after £2040

850% increase in tax liabilty due to 1 BTL prop

This is the support that std tax rate payers will get, the people GO mentioned that had worked hard and saved for a property. One of the standard rate taxpayers that wont be affected by the restriction of relief.

Appalled Landlord

15:56 PM, 7th August 2015
About 3 years ago

Hi Trendo

You mean he's one of the people who doesn't think he will be affected because he is not a higher rate payer today.

George Osborne must have meant those who had saved up the full purchase price of their BTL property, and so didn't need to borrow! Which is very difficult for a basic rate payer to do.

Btw, the increase is only 750%!

Trendo

16:12 PM, 7th August 2015
About 3 years ago

Reply to the comment left by "Appalled Landlord" at "07/08/2015 - 15:56":

Thanks AP

750% increase in tax due (£1800)

850% of £240 is the actual tax due figure payable (£2040)


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