Summer Budget 2015 – Landlords Reactions

Judicial Review

http://www.leighday.co.uk/LeighDay/media/LeighDay/documents/JR-Quicky-and-Easy-Guide.pdf

GROUNDS OF CHALLENGE
The different grounds
Decisions by public bodies can be challenged on a number of grounds.
For example if,
• the public body does not have the power to make a particular decision, or it has
used a power which it does have for an improper purpose;
• the decision is irrational;
• the procedure followed by the public body is unfair or biased;
• the decision taken is in breach of the Human Rights Act;
• the decision taken is in breach of European Community Law;
• the public body failed to comply with one of its legal duties, for example, the
public sector equality duties.

Reply to the comment left by "KATHY MILLER" at "26/08/2015 - 18:14":

God Kathy - I think we could get them on ALL of those!

Reply to the comment left by "Barry Fitzpatrick" at "25/08/2015 - 12:38":

Also remind him that Lts Cos only pay tax at 20, no 19, no 18 % anyway. None of them pay any tax at 40 or 45% - tax all a sole trader's income at 20% then - level playing field ...

Reply to the comment left by "KATHY MILLER" at "26/08/2015 - 18:08":

The homes would be built by private builders and then sold at 80 per cent of market value, or no more than £450,000 in the capital and £250,000 in the rest of the country. !!!!!!!!!!!

No more than 250,000 in the rest of the country?! That's not a starter home round here, it's mansion. You can get a nice 3 bed terrace in my street for about 75-80000.

What FTB earns enough to pay a mortgage on 250,000?

RLA has mailed out the petition link today.

"A petition to ‘Reverse the planned tax relief restriction on individual landlords’ has now reached nearly 20,000 signatures. The petition follows the Summer Budget announcements which will see many buy to let landlords affected by reduced Mortgage Interest Relief (MIR) to the basic rate of 20%. If you haven’t signed the petition please consider doing so now."

REPLY FROM MEGAN SHAW hmrc TO THE OBSERVATIONS WE HAVE MADE on the example she supplied. .....

Many thanks for your email.

I'm afraid you may have misinterpreted what was said in the Budget speech. Here's an example that demonstrates the mechanism, showing that someone who is currently a basic rate taxpayer could be a higher rate taxpayer under the new rules (using an £11,000 personal allowance and a £43,000 higher rate threshold):

Before Restriction (16-17)
£
After restriction (20-21)
£

Salary
40,000
Salary
40,000

Property income 15,300
Property income 15,300

Less Other costs (3,300)

Less Other costs (3,300)

Less Finance costs (10,800)

Less Finance costs (0)

Property profits
1,200
Property profits
12,000

Taxable income
41,200
Taxable Income
52,000

Less Personal Allowance
(11,000)
Less Personal Allowance
(11,000)

Tax due on
30,200
Tax due on
41,000

Tax @ 40%
3,600

Tax @ 20%
6,040
Tax @ 20%
6,400

Total Tax
6,040
Total Tax
10,000

Less Finance Costs @ 20%
(2,160)

Final Tax
6,040
Final Tax
7,840

Megan Shaw
Product Owner - Property Income & REITs
HMRC, Room 3/64, 100 Parliament Street, London, SW1A 2BQ
03000 585628

From: trendoben
Sent: 18 August 2015 17:07
To: Shaw, Megan (CTIS); trendoben
Subject: Only 1 BTL and HMRC tax me out of business !

Ftao Megan Shaw

I came across your example along with the observations as below, I am very confused by it, as The budget speech stated that people who currently paid standard rate tax would not be affected by the proposed restriction of tax relief,

Clearly from the example below, current std rate tax payers are about to be mercilessly fleeced with the new method of calculation artificially escalating them into higher tax bands?

Please confirm that in your example the individual will actually pay tax of £2040 on an actual profit of £1200 i.e. A rate of 170% of profit , also a second identical property would attract a tax liability of £2640 an effective rate of 220% on profit ?

This surely can not be correct, has someone got something wrong here ?

I am also confused by the term "tax relief" ?

If we could deduct BTL interest from our salaries or any other income to reduce tax, that would be a tax break. But we can’t and that is not why we took out the loans.

We took them out to buy assets that would yield taxable income, like any other business. And we should be allowed to continue to deduct finance costs, just like any other business.

signed...

Only 1 BTL and HMRC Tax me out of business!

From Observations of the very simple example below we can see that :

1. A 20% tax rate payer is pushed into the 40% band with the new proposals
2. The taxable property profit Of £1,200 will be deemed by HMRC to be £12,000
3. The “real profit” of £1200 was initially taxed @20% making tax due £240
4. The tax payable increases by £1800 making a total of £2040
5. The tax liability completely wipes out the profit and leaves a further liability of £840.

6. In percentage terms £2,040/£1,200 x 100 is 170%, the effective rate at which tax will be paid.
7. This simple model is no longer viable, the landlord must sell up, pay down borrowings or increase rent.

8. The tax due figure has increased by a factor of 8.5 ...How can anyone justify this ?

Example:

Prop rental income is £15,300, or £1,275 pcm (a 3, 4 or 5 bed HMO maybe depending on location)
Prop Val £275K
Expenses: 10% agent fees (£1,530) and a few repairs, gas safe, insurance etc =£3,300
Finance on a loan of £216k (78.5%LTV) @ 5% = £10,800
Net profit £1,200
These figures are very realistic and common place for individual Landlords, this example represents a large number of landlord positions.

If the landlord had a second property, also with a profit of £1,200, his tax in 2020/21 would go up by £2,640 compared to his liability if he only had one. The effective tax rate on this second property would be £2,640/£1,200 x 100, or 220% of the rent.

Under the current system this landlord would have remained a basic rate taxpayer even with 2 properties. Under the proposed system he will very much be a higher rate taxpayer.

After April 2020 (when the restriction will be fully implemented) landlords who incur interest (and other associated finance costs) on residential properties that they let will need to calculate their tax differently. You will no longer be able to deduct interest from your rental income to arrive at your taxable profits, you will instead receive a reduction from your income tax liability equivalent to 20% of those interest costs. If that means you become a higher rate taxpayer (or you were anyway) then you will have to pay more tax as a result of this change.

Please see the example below. This comparison is designed to show the effect of the change, not to calculate someone’s exact tax liability. The tax bands were rounded off for simplicity, and applied to both years so as not to confuse the result of the calculation.

Before restriction 2016-17 £
After restriction 2020-21 £

Salary 40,000
Salary 40,000

Property income 15,300
Property income 15,300

Less Other costs (3,300)
Less Other costs (3,300)

Less Finance costs (10,800)
Less Fin costs (0)

Property profits 1,200
Property profits 12,000

Taxable income 41,200
Taxable Income 52,000

Less Personal Allowance (11,000)
Less Personal Allowance(11,000)

Tax due on 30,200
Tax due on 41,000

Tax at 40% 3,600

Tax @ 20% 6,040
Tax @ 20% 6,400

Total Tax 6,040
Total Tax 10,000

Less Finance Costs @ 20% (2,160)

Final Tax 6,040
Final Tax 7,840

Please do get in touch if that doesn’t clarify the mechanism.
The Bill is subject to parliamentary scrutiny and so there are no guarantees as to what will become law before the Bill receives Royal Assent in Autumn.
Megan Shaw
Product Owner – Property Income & REITs
HMRC, Room 3/64, 100 Parliament Street, London, SW1A 2BQ
03000 585628

This article sums up what we are up against,

http://www.theguardian.com/money/blog/2015/may/30/tax-breaks-buy-to-let-landlords

It says buy to let has sent home ownership in Britain careering into reverse.

We need a robust defence against claims like this. Please list the reasons why the author of this article is wrong. The comments can be summarised and submitted to the Public Committee to support our position.

Reply to the comment left by "Kathy Evans" at "26/08/2015 - 19:39":

My brother's house just went to FTB for 179950 full asking price.

But they are at their limit because they have ask whether any furniture could be left.

But that said its a very large 3bed semi with garage and I think due to FTB buying when they are older they look to find a place which will be ok for 10+ years. I think this is a shift from just buying the lowest priced property to get on the market

WOW nearly 20000 signatures!!

On the bright side, I have had a meeting with my accountant, who seems to suggest, that this forthcoming legislation is VERY UNLIKELY to be implemented as there are too many flaws and there are general consensus amongst accountants that, it won't happen.

The most likely scenario would be that the legislation will vary to the fact that, it will only impact those who are already higher rate tax payers not who become as a result of it.

Secondly, my accountant held a conference call amongst his 131 clients and only 7 of them knew that was coming and how it impacted them. Rest of them did not have a clue.

WOW nearly 20000 signatures!! What a milestone achived.

On a brighter note, I have had a meeting with my Accountant who seems to suggest that, forthcoming legislation is "VERY UNLIKELY" to be implemented.

Most likely scenario would be that, it will be varied to people who are already higher rate tax payers as opposed to who become higher rate tax payers merely because of aforementioned legislation.

In addition, my accountant held a conference call with his 131 Buy To Let landlords (clients) and only 7 of them knew that, legislation was coming and how it impacted them.

Rest of them did not have a clue.

It ain't all over till the fat lady sings it!