Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "Trendo " at "25/09/2015 - 00:06":

The REAL bombshell is actually a TIMEBOMB of nuclear proportions. My original analysis of my own position was in reality OK'ish; so my tax has to go up by a fair chunk but I could live with it.

My recent stress testing on my business model with interest rises thrown in is devastating!! I've been aware of the high-level impacts for a while now, but I've only just realised the impact of interest rate rises. The real eye-opener for me is the exponential effect when BBR moves from 3% to 3.5% to 4% the effective rate of tax doesn't just goes through the roof it goes BALLISTIC.

Many LLs haven't even cottoned on to the high-level impact let alone the impact with interest rate rises, which in combination with the tax change has a compounding effect.It is NOT a little more tax with the tax grab, and a little less profit with an interest rate rise. In my case a rise in BBR from 3% to 4% result in an effective tax rise from an eye-watering 73% to 276% and I am just a basic rate taxpayer!!

I've used a slightly modified version of the spreadsheet available on the Property118 website which allows me to calculate the mortgage interest based on BBR, and then calculate the "effective tax rate" on "actual" rental profits.

I would every LL to do a stress test on his situation taking into account both this proposed tax change and interest rate rises.

Reply to the comment left by "Barry Fitzpatrick" at "25/09/2015 - 09:27":

Hi Barry.
Yes, when I speak to anyone I point out what my situation will be like with a 3 or 4% interest rate rise. With a 3% rise, my actual profit drops to £5,000pa, but my deemed profit is £90,000 and with a 4% rise, my actual profit goes into minus territory of -£10,000, with my deemed profit at £105,000!
Can anyone tell what my effective tax rate will be in the latter instance???
I think Richard Dyson could do a good article on tax rates on minus incomes - I will probably suggest it to him and to others.

Reply to the comment left by "Barry Fitzpatrick" at "25/09/2015 - 09:27":

Barry....can you not use the next four years as time to plough profits back into paying down some of those debts? Or is the profit income you need to live on? It should buy you some time whilst inflation related rent rises play catch up to make your proposition more viable.

A new report released by the Department of Communities and Local Government relating to the second quarter of 2015 homelessness has increased, with the main cause being the end of a private tenancy. This was an increase of 5% higher than in the same quarter last year. 63% had to be placed in temporary accommodation.

THEY AIN'T SEEN NOTHING YET !

This was reported in "PropertyIndustryEye" http://www.propertyindustryeye.com/homeless-on-the-rise-as-more-private-tenancies-end/

The full DCLG report can be viewed here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/463017/201506_Statutory_Homelessness.pdf

Owh dear....The bbc joining in on the doom and gloom....

http://www.bbc.co.uk/news/business-34356801

Bit of a non story in my view.

Reply to the comment left by "Costas Tzanos" at "25/09/2015 - 10:24":

@Costas

The profit from my properties provides a chunk of my living expenses, so cannot be used to reduce my mortgages. Even if I could over the next 5 years it would reduce my mortgages by 10%.

I think for many LLs the Chancellors "time to adjust" means increase rents, sell up or convert to a Ltd Co.

I will be increasing my rents straightaway probably at 6-7% per year (assuming the market will bear it).

Reply to the comment left by "Ros ." at "25/09/2015 - 10:22":

@Ros,

I don't see how your "deemed" profit can rise to £105,000, if purely due to an increase in the interest you pay. HMRC will under the new rules deem your profit to be rental income less non-finance expenses; in other words if your rental income stays the same and your other non-finance expenses remain unchanged then the deemed profit is the same no matter what interest rates do and what interest you pay.

If interest rates rise the amount of tax you pay will go down because of the 20% "tax relief" you receive on an increased mortgage payment, BUT (and here's the rub), your actual profit will fall 5x faster than the increase in tax relief. So for each extra £100 you pay in interest to your Lender, HMRC will only decrease you tax liability by £20. If you remain a basic rate taxpayer under the new rules then there is no change, but if you're deemed to be a higher rate taxpayer then you pay overall an extra 20% tax (or 45% if you fall into the Additional Rate bracket) on the deemed income over the Higher Rate threshold. This is the compounding effect I mentioned in my earlier post.

I haven't been on for a while, but had to play devil's (sic. HMRC's) advocate for the argument that "BTL is a business and takes a lot more time, involvement, phone calls about no hot water etc which you don’t get when buying shares". I believe that there is an argument that HMRC could make regarding the "BTL requires time and effort" stance (I am not saying it doesn't take time and effort, btw).

Anyway, I think it could be argued by HMRC that phone calls about no hot water etc are considered as property management activity (theoretically, it can be performed in its own right, regardless of who the asset owner is).

With this in mind, it could be further argued that BTL as a business can be split between a property management activity and an investment activity, for which well-defined costs, income streams and taxes can be apportioned.

For example, HMRC could argue that estate agents charge around 10-15% in management fees, therefore the property management activity part of BTL amounts to some 15% of gross rental. This would be apportioned as 1) a cost to the investment activity and, 2) an income for the property management activity.

If HMRC takes this tack, and as the "time and effort" has been deemed to constitute only 15% of the gross rent, this leaves landlords having to argue to HMRC that the remaining 85% of gross rent is not investment income and ultimately that BTL is not an investment activity (even though it could be deemed that the majority of income is not from business activity).

It's just something to think about and kick around. If you don't think that HMRC could argue it then please feel free to ignore.

Reply to the comment left by "Ros ." at "25/09/2015 - 10:22":

@Ros,

I don't think you can calculate an effective tax rate on negative profits!.

But if the tax due on your deemed rental profits was say £10,000 and you actual profit was £1; then the effective rate would be 1,000,000%. It makes Wonga's rates look very fair and cheap.

Also, appears that the BoE thinks help-to-buy good, buy to let bad.

http://www.telegraph.co.uk/finance/bank-of-england/11890392/Buy-to-Let-economic-stability-Carney-Bank-of-England.html