Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "Appalled Landlord" at "13/07/2015 - 01:26":

Really interested to understand what happens to income losses forward because that has a massive impact on what my model has been.

Not sure what the 'unused finance costs' would be. If I use finance costs in the year (which I guess most if us will) and get my 'relief' surely it will mean I still show a higher than before 'taxable profit' and that eats into previous losses.

Reply to the comment left by "Anne Nixon" at "13/07/2015 - 07:22":

I think someone has done that in the thread somewhere (I know it's long).

Reply to the comment left by "Gary Nock" at "13/07/2015 - 00:47":

This debacle wouldn't convince me to vote labour, not a chance.

Anyone fancy 'Right to Buy' off private landlords?

Reply to the comment left by "Appalled Landlord" at "13/07/2015 - 00:41":

Hi

You asked me to post my tax calculation which I've done as we are coming up with different numbers. I've just seen this post and now see how you are doing your calculations. This is all open to interpretation but from the government release ...

"Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs."

I take this to means that you submit your profit on your tax return as you normally would (but this time the profit is much higher as you can only deduct some finance costs when it's partially active and none when it's full active), your tax will then be worked out and then you'll get a deduction from your total tax liability at 20% of your finance costs (when fully active, pro rate less when it's partially active).

Mark your " vision 20:20.

The capital gains tax of 18% is perhaps applicable in the North of England.

It seems to me that one has to be a minimum paid employee to not to fall into the 28% and the gain is not more than say £35k Due to the fact that the capital gains tax added onto the salary.

E.g salary £15k, gain on sale of property say £40k=£45k , This takes one into the 28% CGT.

There is no tapering relief to the best of my knowledge..

Reply to the comment left by "Phil Landlord" at "13/07/2015 - 08:17":

Hi

I think we are all struggling with interoperating these rules and we will have to wait for some more details (but like most I want answers now!). The phrase you have mentioned is with regard to what amount do you get the 20% relive on which is the lower of (quoting from the government release)

"a) the finance costs not deducted from income in the tax year (25% for 2017-18, 50% for 2018-19, 75% for 2019-20 and 100% thereafter),

b) the profits of the property business in the tax year, or,

c) the total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year.

Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year."

End quote! Because of the wording of that final paragraph I think it's referring to the second clause (as it's wording matches exactly). That clause kicks in when your taxable property profit is less than your finance interest i.e. you are making an actual loss and your loss is reducing you taxable profit. So in Marks' scenario 3 you are making a £25K loss after interest payments of £100K so taxable profit is £75K. Clause B kicks in and you only get relief on 75K rather than £100K. You get to roll over the 25K of finance that didn't get used into another year for when you are making money and you are calculating your tax relief via the first clause.

I stress again that's it's very early days, I know we all want answers but this is all quite complex and we'll probably have to wait for more information before we try and see if there are strategies to help us.

If any landlords would like to voice their thoughts to the Prime Minister regarding this measure, here is the link.

https://email.number10.gov.uk/

Reply to the comment left by "Jason E" at "13/07/2015 - 01:28":

Hi Jason

Thanks for posting your calculation. I went to bed before it became live.

I answered Mark’s question from his standpoint – that of someone whose is other income made him a higher rate taxpayer because it exceeded the personal allowance and the 20% band.

I used 40%, as the higher rate but judging from his later post I should perhaps have used 45%. The latter would have made the tax payable £18,750 for 2020/21 whether the interest rate had gone up or not, i.e. the result was a real loss or just break-even..

Your example is taken from the opposite end of the scale – a person who has no other income whatsoever. In this case the personal allowance and the 20% band will be used up before the higher rate is reached. But in this case the personal allowance also has the effect of reducing the tax relief, as you clearly show.

I agree that on the figures from Mark’s example, someone with no other income would pay tax of £6,523 for 2020/21 based on the current personal allowance and 20% band (and.there is no point in guessing what they will change to for the purpose of this exercise).

So the answer to Mark’s question is that the landlord, whether he makes a real loss or just breaks even, will pay tax of somewhere between £6,000 and £18,750, depending on his other income.

To find where an individual taxpayer is in this range he or she needs to do a calculation using the his/her own figures for rent received, allowable costs, finance costs, and other income. Examples of such calculations which you can use as a template can be found at: http://www.mortgagesforbusiness.co.uk/news-insight/2015/july/how-the-restriction-of-relief-on-btl-mortgage-interest-will-affect-landlords/

Hi Appalled Landlord
Your insight into this is very good. Do you think there could be some kind of error in the way HMRC interpreted the new rules? George Osbourne has said tax relief on the interest is restricted to 20% and HMRC have said the interest/financial costs are no longer an allowable expenditure. Surely, the interest/financial costs must still be an allowable cost in order to get 20% relief on it. Under the old system - you should have been paying 40% tax on the interest if you were a 40% taxpayer ie. tax relief at 40%.- the new system states this relief is restricted to 20% even if your taxable income makes you a 40% taxpayer.
If HMRC are correct - then they are treating the interest/financial costs as income - which they clearly are not. This means this "income" is included in calculating your taxable income - which means pushing you into a higher rate tax band.
The overall effect of this is that you pay income tax on imaginary income and have to borrow the money or use savings to pay this tax.
What are your thoughts on this?

Mervin

Like many people I am trying to get to grips with these changes. Please can you explain how you arrived at the following opinion?

Step 1 – Determine whether you are a 20% tax payer, 40% tax payer or 45% tax payer. i.e. This only applies if you have a source of income other than your ‘property income’.

I can't see anything on the HMRC guidance that indicates this is how the changes will be implemented. The guidance suggests that ALL your property income (after other allowable costs) will be used to determine your tax band.

I sincerely hope your interpretation is correct, but I fear it may not be.