Section 24 will make me bankrupt!

Section 24 will make me bankrupt!

15:36 PM, 23rd October 2017, About 4 years ago 46

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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.

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.




by Lindsey

13:37 PM, 25th October 2017, About 4 years ago

Reply to the comment left by havework willtravel at 25/10/2017 - 13:21
Nevertheless, the OP is correct that as a Limited Company director who does NOT fall within the higher rate tax bracket, you would not have paid dividend tax prior to 2016. Also that the funds in question have already been subject to corporation tax.

Are a PAYE employee you would also get the benefits of sick pay, holiday pay, redundancy pay and protection by employment law - so the two positions are hardly comparable.

by havework willtravel

14:16 PM, 25th October 2017, About 4 years ago

Reply to the comment left by Lindsey Sharratt at 25/10/2017 - 13:37
I knew someone would come back with a comment, just as well I did the figures in the meantime eh......

PAYE earning 40K would pay £9520 in tax and NI - taking home £30480
Ltd Company with 1 director taking home £30480 would have paid approx. £5520 Corp Tax and £1048 Div Tax = £6568

So quite a bit less overall

by Mark Hunter

16:31 PM, 25th October 2017, About 4 years ago

Reply to the comment left by Richard U at 23/10/2017 - 16:50
Thank you for your comments Richard. There is a lot of competition in our area amongst Letting Agents. Many are shopping around and asking for discounts or reductions and I feel it is unlikely we will be able to pass on any of our new expenses to them. I am considering the idea of converting some of my more suitable properties to holiday lets as you say. There have been some very useful suggestions from other readers too and I am very grateful for the concern and help people have been offering me. It's good to know that people care.

by Mark Hunter

16:33 PM, 25th October 2017, About 4 years ago

Reply to the comment left by Ian Baggaley at 25/10/2017 - 05:32
Thank you for your comment Richard. The £70,000 figure quoted include a management fee my Letting Agency charges to reduce the overall profits on the portfolio (on the advice of my accountant).

by Lindsey

18:37 PM, 25th October 2017, About 4 years ago

Reply to the comment left by havework willtravel at 25/10/2017 - 14:16
Indeed - until you are sick for six months and can't get any assistance. Then it rapidly becomes quite a bit less. £3k does not last many weeks.

Of course, if you can guarantee that you're never going to get ill , it's a no-brainer.

But glad it gave you a happy feeling to work that out.

Believe it or not, some of us knew that somebody was sure to come up with the PAYE argument. Of course, Mr Osborne and pals got there before you. They were not looking at the full picture either.

by havework willtravel

19:18 PM, 25th October 2017, About 4 years ago

Reply to the comment left by Lindsey Sharratt at 25/10/2017 - 18:37
Here's the thing though Lindsey. Many, many people, including me, work through Limited Companies and we don't feel we're somehow different and entitled to pay less tax. Argue away all you want about Section 24, but VAT, Corporation
Tax and Dividend tax are borne by every limited company so just suck it up and get on with it.

by Richard Mann

20:17 PM, 25th October 2017, About 4 years ago

Reply to the comment left by havework willtravel at 25/10/2017 - 19:18
Very helpful.

by Lindsey

8:02 AM, 26th October 2017, About 4 years ago

Reply to the comment left by havework willtravel at 25/10/2017 - 19:18Suck it up nothing.
VAT, Corporation Tax - no issue.
Dividend tax = double taxation. Issue.

Out of interest though - "we don't feel we're somehow different and entitled to pay less tax. " And yet by definition you are subject to drops in income if work is not available, profit margins need to drop, illness interferes with work etc. Do you not feel that there should be some benefit for the risk that you take, which is over and above that of an employed person?We are "different" by definition, as we are not protected by employee law.

by Mark Alexander

18:08 PM, 30th October 2017, About 4 years ago

Reply to the comment left by havework willtravel at 25/10/2017 - 19:18
companies don't pay dividend tax, only shareholders pay that

by Lindsey

19:49 PM, 30th October 2017, About 4 years ago

Reply to the comment left by Mark Alexander at 30/10/2017 - 18:08
Absolutely, Mark, as you say.

I took it that the comments were made in the contexts of a Ltd Company director who is also a shareholder and thus takes dividends. The ownership of a company, from which dividends can only be drawn from profit, is clearly different from being a PAYE employee.

I get frustrated by the implications that are thrown about that the two can be directly compared.

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