Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "Jerry Jones" at "12/07/2015 - 11:09":

The more I have understood this change the more I come to realise some of the situations arising may be very deliberate. They are designed to stop the very model many of us have used ie borrowing for 'investment' purposes. (I know many of us believe it is not 'investment' but I think that is THEIR point)

From an accountancy viewpoint this feels very wrong. However, this looks to be a very political decision.....I think this is starting to make sense. (that does not mean I agree with it.)

I wonder if the Government may look again particularly the manner of how we believe the calculator works. Still the same net 'tax effect' - but increasing a gross income has other consequences which may not have been intended eg :
1) BRT may become a HRT.
2) Impact on ability to borrow due to larger income
3) Maintenance/child payments etc etc

So political rather than business decision.....and now its started it will be one to watch.

Reply to the comment left by "Neil Robb" at "12/07/2015 - 08:25":

Hi Robb
There is no point in trying to understand the change because it is incomprehensible.

It will be a levy on money paid out to a third party, not a tax on an income.

It will become payable if the interest, when added back to your rental profit and all other income, takes you into the higher rate band. Currently this happens at £43,000.

The levy will be payable even if you have no rental profit at all due to interest and other costs equalling or exceeding rent received, if the total of interest plus all other income puts you in the higher rate band. So you would have to pay it out of savings.

If the Bank Rate goes up, your mortgage interest will go up. So your rental profit will go down - but the levy will go up!

However, the change only applies to properties held in the owners’ names rather than through a company. Why should those who started companies to avoid the higher rate of income tax be exempt from this levy?

This proposal has unsettled the BTL sector and so could cause another house price fall just as the economy is starting to recover and people are starting to climb out of negative equity.

In the same week that the government announced that it intended to make planning approval automatic for building on brownfield sites, the Chancellor has alienated investors. The government wants to make it easier for developers to build the houses and flats the country desperately needs. George Osborne has deterred BTL investors, who used to kick-start developments by buying off-plan. Thus developers will not be able to sell as many units, and therefore build as many, as they otherwise would.

The interest incurred on loans taken out to buy assets that are employed in a business is fully tax deductible from income in every other type of enterprise. Why should the provision of accommodation be treated differently? I could understand a levy being applied to an activity that he wants to deter, like the provision of tobacco or alcohol whose consumption puts a burden on the NHS. I don’t know why he would want to deter the provision of rental accommodation, already in short supply, which facilitates the mobility of labour both within the country and from outside it, to the benefit of the economy as a whole.

The NLA described it as a sop to the Labour Party and the Green Party. Why should he give them a sop after these parties were comprehensively rejected by the electorate?

It is an attack on his party’s natural supporters. Why would he do that?

To quote the earlier postings of Simon and Mark, has he lost his mind?

Reply to the comment left by "Appalled Landlord" at "12/07/2015 - 13:15":

Appalled Landlord - The figures for old and new change in future years as the changes are implemented.

Gary Mason - struggling to understand how interest would be added to income and tax to be applied. Can you provide clear explanation of your understanding including.

Rental Income
Costs
Interest

That would be helpul to understand how you are looking at this.

I have a question i have heard on this forum it states you have to determine whether you are a basic rate tax payer or higher if the rules apply, i am having a difficult time understanding this, Could someone please help, so if my day job i have a 20k salary and my property income is 150k per year , interest of 70,000 and costs of 40,000., would the rules apply to me, ? i dont understand if the rule applies as you have to know your tax band first before property rental comes into play ? Could someone please help,

Reply to the comment left by "Appalled Landlord" at "12/07/2015 - 02:02":

Very interesting article, however, it doesn't include my favoured approach which would be to pay down borrowing if at all possible. It's a well known financial adage that you shouldn't let the tax tail wag the business dog i.e. do not do anything solely for tax reasons. Like a residential mortgage one model would be to start paying or saving to pay off capital sums on your highest rate loans.

Although I still don't "get it" in its entirety - a concept problem with me I think - the example given by the mortgage advisers helps and shows that basic rate yaxpayers

Sorry editing key not working -should read basic rate taxpayers are not affected in most instances. Still can't get my head round the interest not being wholly claimable as a business expense in its entirety but I am getting there slowly.

Reply to the comment left by "Gary Nock" at "12/07/2015 - 14:10":

As I have come to understand and to what I believe is correct,

Today you reduce the £ value that tax is calculated on deducting interest costs (as well as other allowable costs) from your gross income.

In the future you do not deduct the interest costs, as a result the value that tax is calculated on is going to increase (impacting many 20% tax payers today by pushing them into 40% bracket).

You then have tax relief at 20% applied on the tax amount calculated to reduce the amount of tax due to be paid.

So as below,

Gross Income - Costs = £ value for tax to be calculated

That tax amount as calculated is then reduced with the 20% tax relief applied on the interest costs.

Your Net Income then would be Gross Income less costs less the adjusted tax amount.

I'm intrigued still to understand how the methodology of Gary Mason works on this i.e. why the interest will be a laibility and be taxed. It's still a cost just not a cost that can be used to reduce your net income for tax calculation purposes.

Reply to the comment left by "Jack D" at "12/07/2015 - 14:28":

Hi Jack

You described how the interest will become taxable at the start of your posting:

"Today you reduce the £ value that tax is calculated on deducting interest costs (as well as other allowable costs) from your gross income.

In the future you do not deduct the interest costs, as a result the value that tax is calculated on is going to increase (impacting many 20% tax payers today by pushing them into 40% bracket)"

Reply to the comment left by "Jack D" at "12/07/2015 - 14:28":

It's about the difference between relief and cost. Let's assume we only have interest and income, making a very simple example.

income 1000
taxed at 40% = 400 owned to the Tax man
taxed at 20% = 200 owned to the Tax man

if you pay interest it gets you a relief of maximum 20%
interest paid 500
tax relief at 20% = £100 tax man will let you off this part.

therefore if you pay at 20% tax
(tax owned)200 - (relief)100 = £100 this is what you have to pay.

however at 40%
(tax owned)400 - (relief)100 = £300 this is what you pay.

As you can see there is now a huge difference between the two examples.
Twice the tax rate but 3 times as much tax is due.

I fear this change will not have much effect on people who are using property to boost income in pensions (likely to be in the 20% tax bracket) or have it structured as a business(don't pay income tax) or who are wealthy enough to have no mortgage any way. They are not paying for a mortgage anyway.
It will affect the working landlord.
I.E. like me those who have a job who saw property as a way to invest for my retirement unfortunately once the full changes kick in I will be subject to about 1.5K of tax each year on each property.

Therefore I see only two options for me.
1. I raise rent to try to cover this new payment.
2. I sell and get out.

Since we have 4 years till it kicks in in earnest I will be doing the former as I suspect many other working landlords will be doing. We have worked hard to get a deposit and get a property and we have good tenants, yet we are being asked to fork out a huge amount of extra money and not treated like a business that it is.

For me an investment is something that i can review every 3-4 months.
A property rarely goes a few weeks without something having to be taken care of.
Insurance, Gas Certs, Boiler service, mortgage, deposit protection, new tenants references.

So rents will rise and they will talk more of capping rents. etc,etc,etc