Only 1 BTL and HMRC Tax me out of business!Make Text Bigger
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.
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.
- 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.
Product Owner – Property Income & REITs
HMRC, Room 3/64, 100 Parliament Street, London, SW1A 2BQ
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