What is Aunt Sally going to do now?

by Readers Question

14:27 PM, 5th August 2015
About 3 years ago

What is Aunt Sally going to do now?

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What is Aunt Sally going to do now?

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. What is Aunt Sally going to do now

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?

  1. Give up, and sell her property portfolio now?
  2. Sell some of her properties to reduce her mortgage costs and risk?
  3. Put up rents to help her pay her higher tax bill?
  4. Just get on with it and subsidise her portfolio from her earned income which has already been taxed?
  5. Wait until her lenders call in her  buy to let loans and be declared bankrupt?

Related articles – LINK

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Comments

Dr Rosalind Beck

15:29 PM, 5th August 2015
About 3 years ago

I really like this example and think it is very realistic. Bearing in mind the fact that Aunt Sally has another full-time job, I am interested in analysing roughly how the £40,000 costs other than finance costs would be made up.
To start with there would be insurance: £2,000 pa?
20 gas safety certificates at, say, £60 each: £1,200.
Car and travel expenses: ?
Painting and decorating: ?
Office supplies and telephone charges: ?
Replacement furniture: ?
Repairs and replacement fixtures: ?
Employing a lettings agent/manager @ 10% of rents: 10,000?
With 20 houses, a few might get trashed now and then and require extensive work.
All the time and effort Aunt Sally puts in would not, of course, be recognised as such - it's only if someone else does it that it counts as 'work.'
What do people think?
I'm interested in this as I think we have to show how it is a business and not a passive investment.

Dr Rosalind Beck

18:22 PM, 5th August 2015
About 3 years ago

To add to the list of likely costs, if she has 20 properties, the chances are that each year she is likely to have to replace a full roof or a flat roof, install/replace double-glazing in one or two propertied, one of two boilers will pack in and have to be replaced... £20,000 could easily be swallowed up with those sorts of things.
Also, these days, she is likely to have to do some licensing - pay maybe £500-£800 on those for some or all of the properties at some point and as we know, the fee is only the start of it - there will then be thousands of pounds worth of work ordered - sometimes a complete waste of time and money; I've had to replace small fire extinguishers for large ones that are too heavy to lift and then a year or two later the rules change and the small ones are okay after all. Ditto fire alarms - they demand you put one in and later on, say they're not necessary.
Sorry if I'm getting off the point - but I'm on my own here so far, so I've started to ramble.
As a landlord who does not have a second full-time job and does not employ letting agents and does all the work between myself and my partner, and who is completely dependent on the rental income, it is very annoying to be told you can manage all these houses like a 'pure investment.' Except when others do all the work it counts as 'work.'
Anyway, the issues raised in the above article a lot broader than my comments indicate - they spell no less than catastrophe for many landlords with this iniquitous and confiscatory tax.

Jay James

19:10 PM, 5th August 2015
About 3 years ago

How is the £11,000 tax increase calculated?

Jay James

19:22 PM, 5th August 2015
About 3 years ago

Whichever combination of 2 and 3 produces the highest present value of future transactions relating to the properties.

This will require approximations of future finance costs and future values (to the decision maker) of money in addition to information at hand. Several rates of financing and inflation would need to be compared in this exercise, to see if estimation error makes much difference to current decisions. Critical would be taking sound advice on the likely range of future rates of finance and inflation - if ever there can be such a thing.

A working knowledge of tax is asssumed.

Dr Rosalind Beck

19:34 PM, 5th August 2015
About 3 years ago

Reply to the comment left by "Jay James" at "05/08/2015 - 19:22":

Uh, can we have that in English please?

Mick Roberts

7:36 AM, 6th August 2015
About 3 years ago

Very VERY good. Someone send this all the MP's & Newspapers etc.

Monty Bodkin

9:24 AM, 6th August 2015
About 3 years ago

Mick,

The quick, flippant answer, using round figures, is to put the rent up by an additional tenner (15) a month every year over the next 5 years.

By year 5;
£50 per month increase x 12 months x 20 properties = £12000

Tenant tax bill can be paid and Aunt Sally is in the same position as before.

Course, there is the additional tax to be paid on that but the annual tax exempt amount will go up etc. Just using rough round figures.

Tim Fenn

8:24 AM, 8th August 2015
About 3 years ago

Hi,
This is a great example, I am starting to see a theme, most people with portfolio's that seem to be hardest hit, work full time as being a landlord. Isn't it time we got this recognised as a business an not an investment.
I don't have to repair the boiler on my ISA, or repair the roof while the sun is shining on my savings account.

Jay James

11:40 AM, 15th August 2015
About 3 years ago

Reply to the comment left by "Ros ." at "05/08/2015 - 19:34":

Get some f ing brains and educate yourself. It may not be perfect but it outlines a form of decision making the self employed could usefully learn.

Dr Rosalind Beck

13:09 PM, 15th August 2015
About 3 years ago

Reply to the comment left by "Jay James" at "15/08/2015 - 11:40":

Ah, I think I've spotted a troll. How charming!
For your information I am highly educated, but not in tax matters. I haven't had to be, and I find it tedious. I must however, repeat, that it would be helpful if you wrote more clearly - this could be a helpful link for your further education: http://www.plainenglish.co.uk/
On the other hand, maybe I'm wrong and you're a super-intelligent person, who we mere mortals can't understand.... somehow, though, I think not.


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