What is Aunt Sally going to do now?Make Text Bigger
Aunt Sally has a full time job earning £55,000 per annum. She is a 40% rate tax payer and has a buy to let landlord portfolio comprising 20 properties. She started investing in property 10 years ago.
Aunt Sally is in a quandary. She has heard about the budget proposal to change the way that landlords are taxed. Her rental income is currently £100,000, her mortgage cost are £40,000 and her other legitimate business costs are £40,000, leaving her with a gross rental profit of £20,000. Aunt Sally currently pays 4% interest on her £1M borrowings. She pays £8,000 tax on her rental profit, leaving a net profit of £12,000 after tax which she currently uses to fund her children going to university. Later in life, she plans to use her rental profit to supplement her pension.
Aunt Sally has calculated how much additional tax she would pay when the new tax system is introduced. She has worked out that the tax bill on her gross rental profits of £20,000 would rise from £8,000 to £19,000, leaving her with a net profit after tax of only £1,000. This is not much reward for the investment she has made in her property business and for the services she provides for the tenants in her 20 properties. Her effective rate of tax on her gross rental profit is 95%.
Aunt Sally is aware that interest rates are likely to go up soon. She has calculated that a 1% increase in interest rates would reduce her gross profit to £10,000. Under the new tax system, the amount of tax Aunt Sally would pay would exceed her gross profit so she would be operating her portfolio at a loss. Her once profitable property business would no longer be sustainable.
Aunt Sally knows that if she sells some or all of her properties she will face a significant capital gains tax bill because unlike homeowners, landlords are taxed on capital gains when they sell.
What should Aunt Sally do?
- Give up, and sell her property portfolio now?
- Sell some of her properties to reduce her mortgage costs and risk?
- Put up rents to help her pay her higher tax bill?
- Just get on with it and subsidise her portfolio from her earned income which has already been taxed?
- Wait until her lenders call in her buy to let loans and be declared bankrupt?
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