Section 24 will make me bankrupt!

by Readers Question

10 months 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

steve watt

10 months ago

The section 24 tax rules are not a change to GAAP but are a change in calculating taxable property income for individuals. Together with the withdrawal of 10% wear and tear allowance plus a few other things, the changes for landlords are quite drastic.
I view section 24 as bad tax legislation as amongst other things, it especially hits landlords who are more leveraged: When the loan to value (LTV) is high, buy-to-let (BTL) interest rates tend to be higher and this is coupled with the higher borrowing. The new legislation creates a further handicap to what is already a double-whammy.
However before panicking one should look at one's own position:
When the full effect of section 24 comes into effect in 2019-20, higher rate tax payers (40%), in the worst case will pay extra tax amounting to 20% of the interest cost.
For a landlord borrowing at 2.0% (before Thursday's base rate increase) this is equivalent to an interest hike to 2.4%.
With the possibility that the base rate could be say 2.0% by 2019-20 and thus the borrowing rate then 3.75%, the effective interest rate as a result of section 24 would be 4.5%. This is an alarming level as it close today's rental yield on many properties.
Landlords need to look now at future scenarios and consider whether to de-leverage, incorporate, share property income with spouse, or, as will be the case for many landlords they will weather the storm and accept that conditions have significantly hardened.

Gromit

10 months ago

Reply to the comment left by steve watt at 05/11/2017 - 16:31This is a slightly simplistic way of looking at the extra tax payable. It doesn't take into account if a Landrods pre-tax income is deemed to be over £150,000 and therefore taxed at 45%, nor does take into account the loss of Personal Allowance between £100k and £123k of deemed income, and loss of Child Benefit if the Landlord is eligible, change to Child Maintenance payment if applicable, and any other means tested allowances or benefits..
You're right to point out that the biggest danger is an increase in mortgage rate, as Sec.24 has a magnifying effect on such a change. Few Landlords have run the numbers to see the effect of a rate change, as many are still trying to get their heads around the immediate impact that Sec.24 will have.

Paul Fay

10 months ago

Reply to the comment left by Jerry Jones at 24/10/2017 - 08:49
The fact that only you and the journalist had been to see the MP is possibly an indication as to the extent of landlord ignorance as to what is coming down the line.

Notwithstanding the fact that the MP had not been inundated with concerned constituents, can he not see that this is simply plain wrong? I would be disappointed if the Labour party treated people in this way but the fact that it is the Conservatives beggars belief.

Good luck to anyone affected.

Heather G.

9 months ago

Mark, I would urge you to forward your post to your local councillors and MP, and perhaps even your local papers to communicate the impact the recent changes will have on your community.

Mark Hunter

9 months ago

Reply to the comment left by Heather G. at 06/11/2017 - 17:35
Hello Heather, I sent a copy of the letter by email to my MP and am meeting him tomorrow. He wrote back to say he was interested as he has 9 rentals and one of them has a mortgage! Let's see what he comes up with.

Heather G.

9 months ago

Reply to the comment left by Mark Hunter at 07/11/2017 - 09:48
Best of luck Mark - hopefully it will be a productive meeting. Can you let us know how it goes please?

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