Similar tax for similar incomes

by Dr Rosalind Beck

15:22 PM, 8th March 2017
About 2 years ago

Similar tax for similar incomes

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Similar tax for similar incomes

Philip Hammond stated in the Budget:

‘A fair system will also ensure fairness between individuals so that people doing similar work for similar wages and enjoying similar state benefits pay similar levels of tax.’

I was very pleased to see this basic principle affirmed by the Chancellor as, logically,  he will now have to reverse Section 24.

In my report on this I pointed out the wide differentials in the treatment of very similar, sometimes identical businesses. The link is below as well as the relevant extract. I would now urge people to lobby both Philip Hammond and Gavin Barwell and show them this very clear table which provides incontrovertible evidence that Section 24 must go!

Click Here to read the full report: SECTION 24 of the Finance (no. 2) Act 2015: “The unjust legislation that will make the UK housing crisis much worse”

19 . The differential tax treatment of similar businesses.

Section 24 aggravates what is already a highly contradictory tax treatment of broadly similar (sometimes identical) housing provision. This can be seen in the following table.

Assuming that each of the property owners in the table received an annual rental income of £200,000 and made annual interest payments of £100,000 on the borrowing costs they incurred in setting up their businesses and other costs (repairs, maintenance, running costs etc.) came to £50,000, each would make a pre-tax profit of £50,000. The table shows how after the full implementation of s24, their tax treatment will be hugely inequitable. For example an incorporated landlord would pay £7,950 in tax whilst the ‘individual’ landlord would pay £33,600. The number of properties in the portfolios and the amount of work involved in running the portfolios would be irrelevant as would the ‘professionalism’ with which they were run. As, historically, the preferred advice to landlords was to set up as ‘individuals’ and not as companies, most portfolio landlords who run highly successful and viable portfolios are in the second category of tax treatment.

report snip



Comments

Mark Alexander

8:29 AM, 9th March 2017
About 2 years ago

In my opinion the large build to rent companies will borrow money, probably swaps against long term Gilts.

When I was a commercial finance broker I arranged a lot of private sector financing on this basis, mainly for large corporate landlords who were building medical practices.

At that time, Norwich Union were one of the main financiers.

Gearing of income to debt service ratios were typically 50%.

It wouldn't surprise me at all if Government were to apply a cap on finance cost relief for incorporated landlords linked to interest cover. They have already done this for overseas companies to prevent them taking profit offshore by creating inter-company financing structures.

If Givernment proceed on this basis they will have to carefully consider the implications on a very wide scale.

If anything they are likely to set the cap on corporate finance cost relief at a level which will deter very small operators who are heavily reliant on high gearing and extremely tight margins.

NLA have been scaremongering over this for a few weeks now. My personal view is that if you are not overly exposed in terms of fianance costs as a percentage of gross rents then you don't have too much to worry about.
.

Mark Alexander

8:46 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "09/03/2017 - 08:29":

As a follow up to my last comment ...

One way Government could go would be to cap finance cost relief for companies at 20% of gross income. However, this would have far reaching consequences as it would be too general.

They could limit this by building on the sophistry in Section 24 of The Finance (No. 2) Act 2015 and cap finance cost relief only for residential property to 20% of income. However, this would be incredibly hard to police in terms of SIC codes and apportionment of finance costs across mixed commercial and residential portfolio's. It would also deter many Build to Rent companies so that's also unrealistic if they are serious about supporting build to rent.

The third option would be to cap finance cost relief to 33% of income for corporates as they have for overseas companies. Significant feasibility would have to be undertaken in this regard though to ensure other business sectors are not impacted. This would also be difficult if not impossible to pin down. SIC codes could be an option but companies would simply change their memorandum and articles of association to include another trade which would force a change of SIC code.

Without a long term hedging strategy against interest rates it's actually quite high risk to gear finance costs to more than 33% of total income across in my opinion.

The new PRA rules which set interest cover at 145% of a notional rate of 5.5% are also an interesting formula the Government could also consider for capping finance cost relief. If they do anything this would be the most logical. However, it wouldn't be without its challenges for the reasons I've outlined above, and doubtless many others.

If anybody has close connections to the heads of policy and media at NLA, perhaps you could share my thoughts on this with them?

Thanks in advance 🙂
.

Steve Wood

9:16 AM, 9th March 2017
About 2 years ago

Or they Could just F off and leave business to crack on with business and pay tax and build and provide homes. F-wits

NW Landlord

9:27 AM, 9th March 2017
About 2 years ago

Makes your blood doesn't it will never forgive these torys for what they have put us through over the last couple of years proper stop us in out tracks all for political gain and vote winning ?

Simon Hall

9:28 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "Charles Mackay" at "09/03/2017 - 08:05":

Well Put.

Simon Hall

9:40 AM, 9th March 2017
About 2 years ago

There we go, my point has been well summarised in article below. Check link:
https://www.lettingagenttoday.co.uk/breaking-news/2017/3/will-hammonds-incorporation-clampdown-hit-buy-to-let

NW Landlord

9:46 AM, 9th March 2017
About 2 years ago

Thats why it's crucial to set up now and start running now as a limited company once your up a running ur up and running and as the article said it's a 'minefield' as it's not yet straight forward. Who knows Simon it's all just so unfair, unnecessarily and something I will never forgive these torys for

Whiteskifreak Surrey

9:55 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "Steve Wood" at "08/03/2017 - 19:36":

My sentiments exactly! After yesterday's budget I can see that this country is going to be the country of very rich individuals and big corporations. Small businesses and self-employed - a backbone of the UK - are indeed being penalised for investing their own money, risking a lot and trying not to be a burden for the society.
They can risk alienating their electorate, because there is no viable opposition. Next election I am voting either Lib-Dem or UKIP. Whoever! Never Conservatives again
NB - I do not think incorporation would work for us.. We are too small.

Excuse a digression: the whole 'diesel attack' is mostly in the interest of big hybrid cars' manufacturers. Newer diesel engines / cars are cleaner that petrol ones. Hybrid car is not exactly neutral, and some parts will not last more that 5 years. But the big Co.s must have their share.

Terrible!

Simon Hall

10:19 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "NW Landlord" at "09/03/2017 - 09:46":

NW Landlord, in this given scenario, "up and running" will give you no immunity. If you remember, Individual landlords are also up and running but the government introduced changes retrospectively.

One thing you must not do is to live under false pretence. Although choice is yours.

NW Landlord

10:26 AM, 9th March 2017
About 2 years ago

It's done now so at least for the foreseeable I can trade as normal and there is another way one of my partners is implementing which is a back up,then there is always a u turn. even if I get 2/3 years it will be far more effective then running under our own names, plus we have an experienced barrister in our corner advising etc. Whilst this is playing out we are diversifying into refurbs to sell and building etc so all eggs are not in the buy to let basket there is always opportunities just got to keep moving forward these torys won't beat me

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