Section 24 will make me bankrupt!

by Readers Question

A month ago

Section 24 will make me bankrupt!

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Section 24 will make me bankrupt!

Section 24 will make me bankrupt. I consider myself patriotic. I am proud to be British and have fought for my country, serving twelve years in the Royal Air Force flying on Nimrods.

I served in the Gulf War and Yugoslavia conflicts and spent many hours, days and months away from my young family flying maritime patrols and conducting search & rescue missions. Eventually I injured my back during service and was unable to continue flying.

My wife and I took the decision to leave the RAF and to return to our beloved home town of Scarborough. I was given resettlement training to help me in my next chosen career and we chose to set up our own company as a Letting Agency which we did in 1998. We had saved some money from my military salary and bought a property to rent out as well.

Our business started with just me working hard from my back room and steadily building up a good reputation as an honest, decent person. We have always made a conscious effort to be fair, straight forward and open in all of our dealings. Our principle has always been that if you are decent with people and do the right thing by everyone, things would always be alright. We have never done anything underhand in our business. We have never made any ‘hidden’ charges or been dishonest in any way, and actually do a lot more than is required for most of our landlords and tenants, for no charge at all.

In a current example, for the last few weeks I have been going to feed a tenant’s parrot for him because he is in hospital with a heart condition. I often go to properties to help tenants top up the gas boiler or help change lightbulbs etc., all without the owners knowledge and no charge is made. We are suckers for a sob story and often give people a chance by letting them rent one of our own properties even though they could not pass a formal reference. This does backfire sometimes and we end up going through the drawn out eviction process to get the property back. This results in us losing a considerable amount of money, but we do not want to change ourselves and are happy that we can sleep at night knowing we do our best to help people.

Having started with one property of our own to rent we have over the years managed to build up a good size portfolio of properties that we own, all on interest only mortgages as this was the advice we were given when we were purchasing buy to let properties. Our letting agency is now a limited company as this was the good advice we received from our accountant many years ago.

Tax changes.
Our income is derived from two sources. We each take a dividend from our limited company and we have a profit from our portfolio of buy to let properties. The recent changes brought in by the current government will make us bankrupt unless something changes.

Section 24
The biggest problem by far is “Section 24” of The Finance Act (No. 2) 2015. This is not actually a tax change. It is an amendment to GAAP (Generally Accepted Accounting Principles). It changes the way that profit is calculated on rents received and then introduces “tax relief”. What it means to us in practice is that we cannot use our mortgage interest payments as an expense when working out the profit made by our portfolio. It is being phased in over 4 years and will be fully in force for the 2020/21 tax year. In figures it looks like this;
Rental turnover £170,000
Repairs, maintenance etc. £70,000
Finance costs (mortgage interest) £62,000 actual profit = £38,000 – tax payable at basic rate of 20% (£7600)

The new rules mean we cannot count the £62,000 of mortgage interest payments as an expense so the supposed profit is now £100,000! We have still only made an actual profit of £38,000 but we will be taxed on £100,000. To make matters even worse, this put us up a tax bracket and means we now pay tax at 40% instead of 20% (£40,000).

Dividend Tax
When we changed our company’s trading format to become a limited company we understood that it would have to pay Corporation Tax. We have no problem with this as if you make a profit you should pay tax. It’s as simple as that. Profit made – tax paid. In April 2016 the Government made up a new tax called ‘dividend tax’. This means that when we take our hard earned money out of our company as a dividend we have to pay another tax on it, even though it as already tax paid through Company Tax. For the first two years the first £5000 each is free from this new tax, but from 2018 this is being reduced to the first £2000. For basic rate tax payers the new tax is set at 7.5% of dividend taken. Now we have been artificially bumped up into the Higher Rate of tax, we have to pay 32.5% on every dividend we take. How can this be fair. We are a husband and wife team running a business together which pays all the VAT and Corporation Tax it needs to. That money is TAX PAID. Now we have to pay 32.5% on everything we take from our business on top of the taxes already paid.

Stamp Duty
Looking at ways to try to keep our business going is made more difficult at every turn as well. We are trying to counteract the outrageous dividend tax by increasing turnover. One way is to try and increase the number of properties on our books by attracting new landlords. It is very difficult to pretend that getting into buy to let is really an attractive proposition for potential new landlords. As well as the tax changes mentioned above, the Government has decided to sting landlords with additional Stamp Duty as well (SDLT). This means that if they look into buying a property to let, the new rules mean as a ‘second property’ owner they will have to pay an additional 3% Stamp Duty on the purchase price. It really makes it an unattractive proposition and will put many potential landlords off.

Ban on fees to tenants
Part of our companies’ income is derived from charging prospective tenants a referencing and agency fee. The average cost in England is £388.00 pounds per tenant for this service. We charge £75.00 each and often hear from our tenants how cheap we are and how pleased they are with our service. We do not put our prices up as we feel it is a reasonable contribution towards the time expended by us to carry out our work on their behalf. As I said in the introduction, we are very fair and clear in all we do and do not ever make unfair or unclear charges. The work we do for tenants includes (but is not limited to), sourcing suitable properties for them, doing as many viewings with them as they need, negotiating with the landlord, paying a referencing company to carry out formal checks, assisting with handovers for gas, electricity, water, council tax, telephone, broadband, sky etc. and much more. (We have even helped our foreign tenants sort out their car insurance and loans etc. because they can struggle with language problems). The Government has announced that letting agents will soon be banned from making any charges to tenants. Why should we have to work for nothing? No other profession is banned from charging their clients for work done. When this ban comes in my company will lose around £1000 of turnover every month – that is the amount a junior employee is paid and will result in us being unable to take a new member of staff on as we were planning to do.

Selective Licencing
Local authorities now have the option of bringing in a selective licencing scheme in parts of their town to help deal with rogue landlords and improve the quality of private rented accommodation in the area. Scarborough Borough Council has introduced such a scheme and rushed it through this year. As responsible, decent landlords we went along to the landlords’ forum where this new scheme was to be introduced to us. We asked many questions as to why the Council did not exercise the power it already has, and why we had to pay so much to be part of the scheme even though we are very well known to Scarborough Borough Council and they know we do everything properly. I put it to the Councillor that he was just using good landlords to raise funds so they could chase the few bad ones. He replied ‘basically, yes’. How does this improve an area? We have just paid over £2000 in licencing fees to Scarborough Borough Council. This is money that would have been spent improving our rented properties. Jobs have been cancelled because we cannot afford to do them now.

Summary
I hope I have been able to show throughout this letter that we are normal hard working people who have tried to better ourselves and help other people through the work we do. We own a company that employs another 3 people besides us. We own properties ourselves which house over 60 tenants, and our limited company manages around 250 properties for other landlords. We have no problem paying fair taxes on any profits we make. It is the right thing to do. By 2020/21 our tax bill will go up to around £80,700 when we add up personal tax (the fictional profit from property rental), Corporation Tax (paid by my limited company) and Dividend tax ( a new ‘made up’, Tax). It is too much to bear and we will be unable to continue as we are. We cannot sell the properties we own as there is no equity in them. Some of the properties we own are worth less than their mortgage so if we sell them (and make our 60 tenants homeless) we will have no rental income, but still have some bank loans to repay. We cannot set up a new limited company to shelter our properties from the new tax rules as this would require re-financing them all and paying the unfair Stamp Duty. No lender would give loans against our portfolio with the lack of equity in them anyway. My company cannot expand because buy to let is too unattractive for potential landlords and we will be banned from charging tenants for the work we do shortly. We cannot afford to employ additional staff due to the new tax rules. As it stands, we will not be able to earn enough to pay all the new taxes being imposed on us and still be able to pay our own bills. And this is at current interest rates! The Bank of England has hinted there will be an increase in interest rates very soon. Any increase will have to be paid by us but cannot be taken as a business expense. It will just speed up our bankruptcy.

How can it be in this country, that a loyal proud British couple can work hard for their country, then set up a business to better themselves and their family whilst at the same time genuinely help thousands of tenants and landlords, but be forced through no fault of their own be pushed into bankruptcy by an evil, uncaring greedy tax scheme.

It can not be the intention of this Government to ruin our lives surely.

It is simply not fair and we desperately need some help and something to change.

Mark

 

Comments

Richard U

A month ago

I have a lot of sympathy for your situation - particularly in regards to section 24. And your comments about GAAP are spot-on.

With regards to your letting business, how are other companies making these costs-up? Surely they are charging the landlords - which would seem to be much more like the model for other industries.

Being based in Scarborough, is there the potential for any of the properties to become holiday lets, therefore avoiding the dreaded section 24? As you seem to have a reasonable income today - could you convert any of the properties in such a way they either become worth more money so they could be sold, or make a better rental return?

I guess the last gasp is that you have a year or two before the impact really bites to build some equity.

It strikes me that you are a decent guy and don't want to declare bankcruptcy unless you have to - I really hope you figure a way out of this, and an even more powerful wish: that section 24 is revoked. It is clearly not the right tool for the job.

Mark Alexander

A month ago

Hello Mark and thank you for sharing your story.

You've made it though two wars and you can make it through this one too.

Let's look at how you could transfer your property rental business into a company without having to pay CGT, or Stamp duty, or to refinance.

The benefit of doing this in your case would be that your property rental company would be unaffected by the section 24 restrictions on finance cost relief.

Starting with CGT. If you haven't made any capital appreciation on your property rental business then CGT isn't an issue. If you had made capital gains, there is incorporation relief to roll your gains into shares in a company you transfer the properties into - see https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65700

To qualify for this relief you must be running a business. HMRC's definition of a rental property business can be found via this link https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65715

If you are running a business, the fact that it involves two owners with a view to making profit constitutes a partnership according to the Partnership Act 1890 - see https://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents

If you are both a business and a partnership then under schedule 15 of the finance act 2003 there are provisions to exclude transfers of your property rental business into a company from SDLT providing you transfer the 'whole business'. Guidance notes from HMRC are published here https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm33110

There is a structure know as BICT which will enable you to retain your existing mortgages - see https://www.property118.com/tax/beneficial-interest-company-transfer-bict-structure-explained/

Excuse the intentional air force and military puns that follow please.

I accept that your're taking a lot of flack but there is weaponry available to you so you don't have to face this unarmed. If you rely on us as your command and control centre we will be with you all the way to give you the best possible chance of getting through this.

Please book a consultation via the link below so that we can complete a thorough Fact Find and a bespoke report and recommendations. You need to cross a minefield and if you're going to get across intact, a map plotting a safe route is what you're going to need. We can provide that.

See https://www.property118.com/tax/

Mick Roberts

4 weeks ago

Brilliant words.

Summed it up for a lot of Landlords on Clause/Section 24.
And Landlord Licensing.

Everyone should copy your words & paste it & forward it onto the moron Tory Govt. And the Licensing imbeciles.

Douglas Barley

4 weeks ago

I am afraid that many of us are in a similar position. My financial situation is more or less exactly the same as Marks my ethos is also on fair and transparent trading, I also work in a different sector of the housing market as well. I am now over 70, registered disabled and have to go on working indefinitely - if I do not go bankrupt in the process!. This government does not have a clue on housing, the only thing is that the alternative would be a whole lot worse. George Osbourne was and is a nasty greedy person. The very fact that he managed to obtain his position says a lot. I have always been and always will be a caring conservative, society has a duty to help those less well off - if it calls its self civilized, but cannot do so unless there is a strong and vibrant economy and those that make that economy should be rewarded not punished. At every turn this government does down the poor and small hardworking business - how dare any one try to climb the ladder - lets kick em down seems to be the idea of this lot. On the other hand we could all be planting money trees in our garden and everything will be wonderful - if you believe that you must need help!! More seriously though we must come through this situation and the government must be turned around, how at present I have no idea as all representation seems to have been totally dismissed. The situation is already starting to bit with rents rising and the rental housing sector drying up. I have taken the incorporation path, something I was going to do anyway to enable my business to be passed to my children and I would suggest that Mark considers the same. See the comments above on how to follow this path.

Lindsey

4 weeks ago

Hello Mark,

I feel for you . I am in a very similar position - the big difference is that my other income source is from consulting rather than a lettings agency.

I am very badly hurt by dividend tax (which as you say is a tax on taxed money) and decimated by S24 (which is against the basic principles of accounting).

On top of all the unfair taxation, you have to take into account that if you become too sick to work, as I was three years ago, you can get no help at all because you "own properties" (regardless of the fact that they may have little equity in them.

It's not an option to sell, they are in part of the UK that has negative growth since I decided to make property my pension 10 years ago.

Luckily I only have 6. The keys to three of them will be going back to the bank this week.

I hope that you find a way out of this (and will continue to press the government to revoke S24).

Richard Mann

4 weeks ago

The eloquent gentleman that has taken the time to contribute this article has summarised the dilemma that most Landlords now see themselves in beautifully.
The deliberate destruction of the private rental sector instigated by George Osbourne will have permanent and ongoing social consequences for the most part suffered by those individuals and families that rent their homes from honest Landlords. Bitter and ironic one can't help but feel that section 24 was forced on business owners like a slap around the face for overstepping some imaginary line.
Every time I hear the name George Osbourne I feel sick to the pit of my stomach and am just one step short of throwing up.
While this name is still active in politics and how he is offered any kind of credence from the masses is beyond belief.
I personally hold him responsible for destroying and tainting the lives of 100s of thousands of people while displaying complete arrogance and ignorance.
To the gentleman that wrote the article I understand your position thoughts and sentiments it is utterly unfathomable that such a concept was even dreamt up let alone instigated with such nonchalant vigour, of course in reality every single politician should hang their head in shame at even being associated with such a villainous concept without a single thought or care for those affected.
A few stronger words come to mind and to the mind of most people operating within this business but some composure and refrain is more pertinent on Mark Alexanders website.
The site does have some excellent people that may offer guidance to you and the way for your business to pull through. I hope that you find a solution, perhaps if you do you could post in anonymity your potential solution.
Fully supporting you and our future success !!

Jerry Jones

4 weeks ago

A question for the original poster, Mark: Have you written to your MP and been to see them at a surgery? If so, what was their reaction and do you know how many others have contacted them? I saw mine, John Penrose, who was at least prepared to listen even if he could offer little help. When Ant Lyons, of YPN magazine, went to see him he was told that he and I were the only people who had been in touch, in a constituency full of rented property, West-super-Mare.

Ditto all of the above. Just going through change of accountants and then acting. I have one property up for sale. I am paying the mortgage and Council tax whilst it stands empty. Some current interest but my goodness it is costly. There are a lot of us in the same leaky boat. I can not fathom why our many excellent representations and challenges to the governments unfair treatment of us have not born logical fruit.
Anyone watching gunpowder? It beggars belief that two rival Christian factions kindled such hatred among-st themselves in the name of bigger politics. It is however historical fact. Our potential demise is small scale by comparison and we will keep our heads.
Let's use them as the stats we predicted emerge and get section 24 revoked.

Dr Rosalind Beck

4 weeks ago

I've forwarded this to Sarah Davidson at thisismoney to ask if she would like to do an article on it. It sums up the effect of many taxes and costs coming at one person/couple/business all at once.

SteveoA

4 weeks ago

Mark, feel sorry for you, we're all in the same boat!!
Get your accountant to run through the figures with you as you may feel "a bit" better, looking at your figures, but not seen your tax returns (yours and your wife's, assuming you're 50/50 with her in all transactions) your figures may not be correct. Don't forget that within a few years the basic 20% tax threshold would be around £45000 each (£90K for the 2 of you before hit the 40% rate, so in a way amount over £90K per annum will be subject to 40%), then you'll have your personal allowances which in a few years would probably be around £12500 (£25000 for both), there is still the 20% tax allowance on the £62K interest which is £12400 which comes off the total tax bill, plus the tax free dividend, so not sure if you've thought through tax as I doubt it will be anyway near the £40000 you worked out!

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