14:42 PM, 31st October 2019, About 3 years ago
This case study illustrates just how unfair the UK tax legislation will become for private landlords as of April 2020.
Perhaps more importantly, it provides insight into what can be done to “level the playing field”.
Let’s assume that both businesses own assets worth £2,000,000 and have 75% LTV mortgages secured on them at an interest rate of 5%. In other words, their annual finance cost bill is £75,000.
Now let’s assume that both businesses make profits after finance costs and all other expenses of £50,000.
The hotelier will pay £7,500 of income tax. This is broken down as follows; £nil on his first £12,500 of net profit and 20% tax on the next £37,500.
However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500. This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band. Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500. The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.
To summarise, the private landlord pays more nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.
How unfair is that? !!!
Now here’s where things get even weirder.
If both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.
You could not make it up could you? !!!
In fact, private landlords who provide much needed rental housing are the only business which is persecuted in this way. It’s hard to believe that politicians have turned a blind eye and a deaf ear to campaigning about the unfairness of this policy, which was introduced by George Osborne in the Summer Budget of 2015, but that is exactly what has been the case. The Labour Party and the Green Party want to persecute private landlords even further if they get elected on December 12th.
If you’re affected by this problem, the first thought on your mind might well be to move your rental property business into a Limited Company. However, it’s always not that straight forward.
This is the reason you should book a tax planning Consultation with a Property118 landlord tax consultant.
The transfer of property from private ownership into a Limited Company is treated as a sale and purchase transaction. Accordingly, Capital Gains Tax and Stamp Duty Land Tax could apply. You also need to consider the financing of the properties you are transferring the ownership of.
In most cases there are business structures and tax relief to mitigate these problems, and many of these are explained on the cards at the bottom of this page, which link to more educational articles like this one.
Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).
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