Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "Gary Mason" at "12/07/2015 - 19:33":

Hi Gary

I am a retired accountant, so the concept of some costs being disallowed against income is a familiar one. What is not familiar is having the rules arbitrarily changed so that largest cost becomes disallowed.

I do not claim to be an expert on the matter, and I cannot take any credit. Everything I know about this subject I have gleaned from this forum and the links posted on it, especially to HMRC's description: https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords
and to worked examples: http://www.mortgagesforbusiness.co.uk/news-insight/2015/july/how-the-restriction-of-relief-on-btl-mortgage-interest-will-affect-landlords/

Thanks are due to Mark Alexander for providing this forum. I would have been in the dark without it.

Please can everybody who thinks they know how the tax will work check the following examples for me and if you think I have gone wrong, please explain where you think I have gone wrong and why?

SCENARIO TODAY

Gross rental income: £100,000

Loan interest: £75,000

Other allowable expenses: £25,000

Taxable Profit: £0 (zero)

SAME SCENARIO IN 2020/21 TAX YEAR

Gross rental income: £100,000

Other allowable expenses: £25,000

Taxable Profit: £75,000

Loan interest of £75,000 reduces tax bill by £15,000 (i.e. 20% of interest payable)

SAME SCENARIO IN 2020/21 TAX YEAR BUT AFTER AN INTEREST RATE INCREASE

Gross rental income: £100,000

Other allowable expenses: £25,000

Taxable Profit: £75,000

Loan interest of £100,000 reduces tax bill by £20,000 (i.e. 20% of interest payable)

Thanks in advance.
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Reply to the comment left by "Mark Alexander" at "12/07/2015 - 21:47":

That is my understand Mark. Currently we effectively have 40% relief as higher rate taxpayers. This relief will reduce To 35%, 30%, 25% and finally 20% for 2020/21.

Reply to the comment left by "James Leavesden" at "12/07/2015 - 21:52":

Thank you.

So I was right to say that a higher interest rate will not change taxable profit then?

I was also right to say that that a higher interest rate will reduce cashflow (as it does now) and it will also increase tax relief.

The bottom line is that the changes are very bad news for landlords who borrow money and the more money you have borrowed the worse the scenario is.

It is a crushing blow for my own strategy which I am clearly going to have to completely re-think.

The good news is that I have two years to come up with a new strategy.

The challenges I have are as follows:-

1) My wife and I are both high rate tax payers so there is no more tax planning we can do in that regard.

2) We are highly geared in terms of mortgages

3) Our CGT bill will be horrendous if we decide to sell our properties to reduce our gearing or move them into a Limited Company.

My current thought process is to look at reducing the LTV on my interest bearing loans by paying down to 65% LTV and then gearing back up to 85% LTV by using Equity Finance top ups. One problem with that is that several of my mortgages are with Mortgage Express who will not allow restructuring of this nature at the present time.

I am confident that more windows of opportunity will open, I just don't know what they are at the moment.
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I did a calculation earlier today based on current 20% tax payer with their personal allowance being used for their earned income through salary.

My calculation was that as result of the changes and becoming a 40% tax payer in that particular case the tax due would increase 3x and net income would reduce by over 50% !!

Interested now to try understand how a limited Company set up would change this scenario.

Reply to the comment left by "Mark Alexander" at "12/07/2015 - 22:13":

Yes, an interest rise will not change taxable profits (as finance costs are no longer used in determining 'taxable profits'). It will of course mean a little more relief on interest though.

My situation is pretty much the same as yours, though all my properties are in my name (purchase before with marriage, all with MX, don't want to rock the boat etc...). They do however have LTV around the 50% mark, but yields are low as they are all in London.

Reply to the comment left by "James Leavesden" at "12/07/2015 - 22:20":

Is your wife also a high rate tax payer?

If not, check this out >>> http://www.property118.com/budget-busting-landlord-tax-solution/76249/
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Reply to the comment left by "Mark Alexander" at "12/07/2015 - 21:47":

Hi Mark

Today the tax due on zero is zero.

In 2021 the tax calculation would be 40% of £75,000 i.e £30,000.

The tax payable would be £30,000 less the tax relief of £15,000 that you show, making £15,000. So you would have made zero profit, but would owe £15,000 on it. This means that you will suffer a cash outflow of £15,000 which you will have to make up from another source. This is your extra contribution to paying off the National Debt.

In 2021 if interest had increased to £100,000, the tax calculation would still be 40% of £75,000, i.e £30,000. The tax relief would be 20% of £100,000, making £20,000, so you would only owe HMRC £10,000. But your portfolio will have made a loss of £25,000, so you will suffer a cash outflow of £35,000 which you will have to make up from another source.

Reply to the comment left by "Jack D" at "12/07/2015 - 22:13":

I'm not sure whether anyone has already mentioned this (haven't had time yet to read the entire thread), but if you put properties into a limited company there may be Stamp Duty to pay on them.

Reply to the comment left by "Appalled Landlord" at "12/07/2015 - 22:26":

I see where you are coming from but it's not quite as simple as that even.

The £75,000 taxable profit would be added to any other taxable income.

The 45% tax band starts at £150,000 so if your taxable income is more than that in total the outcome would be even worse! 🙁
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