Summer Budget 2015 – Landlords Reactions

Just out of interest, I've been playing around with the tax calculator, and if there were a 3% increase in interest rates, according to current rules I would have an income of £20.898pa - not massive, but I'd get by (I was brought up on benefits and am very careful with money). Under the new regime, my income would be - £1,021. Anyone else with no income would be entitled to some state help to live on. Not me. I'd have to pay my mortgage and feed myself and my teenage children on less than nothing - because I would have already paid out a load of tax to the Government on a fictitious income. This would be the system until I ran out of money, having given it all to the Government. And this isn't a confiscatory tax?
Also, I will have to somehow bring myself to cancel my standing orders for all my charities, including the long-term support of 3 children via World Vision - in Bolivia, Niger and South Africa and one via Action Aid in Myanmar - because the Government will have stolen my money from me, via their lunatic and discriminatory tax change.

Ranjan Bhattacharya report on the Summer Budget 2015 “The Property Investors’ Survival Guide” is a pretty good comprehensive document.

There is one error which many people make in that he ads the interest cgarges to income to arrive at the taxable income, and that an increase in Interest charges would result in a tax increase which it doesn't.

I've emailed him pointing out this error.

I like his idea of a separate property management company. It's similar to what the big multinationals do I.e.divert profits to another company (albeit an overseas company). It's not that different to a rent-to-rent business.

Reply to the comment left by "Ros ." at "04/10/2015 - 23:18":

@Ros

There's always an interest rate above which a LL will lose money and his/her business be no longer viable. This tax just lowers that threshold.

I think BTL Lenders will be implementing the "EU Mortgage Credit Directive" earlier than required, and applying it to all private Landlords. This will make it more difficult to remortgage and force some LLs to have to sell. Even without this I see rental cover going to 150% at 6-7% pay rates.. Or be stuck with their existing Lender on a high reversionary rate.

Reply to the comment left by "Barry Fitzpatrick" at "05/10/2015 - 00:36":

Barry
Do you have a link to Ranjan's report?

Reply to the comment left by "Barry Fitzpatrick" at "04/10/2015 - 23:05":

Yes, I mentioned this way back at the beginning of the thread and have already started taking evasive action.

At the moment I am not affected by Clause 24 (my gross rents are just below the 40% threshold and I have no 'day job'). But I certainly will be affected by the lack of availability of mortgages in the future. I am already reliant on only 2 or 3 providers. It can only get worse.

Like others on this thread, I may appear to only be marginally affected by this absurd tax, but I wholly believe it is morally and economically wrong. We MUST keep fighting.

Gross Profit - all expenses = Taxable profit.....that's the basis of our tax system...if it's not adhered to, there will soon be no profit of any kind to tax.

Reply to the comment left by "Barry Fitzpatrick" at "05/10/2015 - 00:36":

You're right in that the finance interest a landlord pays on his/her mortgages is not as such added to their income...it's just not deducted which produces the same effect vis a vis being pushed in to a higher tax bracket & possibly losing part or all of their personal allowance plus possibly losing child benefit (not factored in to the calculator) and possibly kids going to Uni no longer being able to get a grant/student loan (again not factored in to the calculator). Also, if interest rates go up over the next few years, borrowers will pay more interest & under the new regime they will also pay more tax & possibly lose more benefits eg if current finance interest is £20K pa on say £666,666 of total borrowing at a 3% interest rate averaged across all properties & the interest rate goes up to 5% = £33,333 pa in interest finance, you're tax liability will increase too. Example; someone earning £50,000 pa from their properties after all deductions, can deduct a further £20,000 for the finance cost & assuming no other income from a day job, they currently pay £3880 in tax & enjoy a net income of £26,120. But by 2021 this will have reduced to £24,597 net income due to a rise in tax to £5403. Then factor in a 2% rise in interest rates over the next 5-6 years, this then reduces to a net income of £13,931 under the new regime. If you then factor in an earned income source from a day job of eg £50,000 on top & assume a 5% rise in net rents to £55,000, their net income would be £61,597 under this current regime. Add to this a 2% rise in interest rates, their net income today of £61,597 would reduce under the new regime to £45,931. This is as a result of a combination of £13,333 extra finance cost + loss of tax relief on mortgage interest paid & £1,000 increase in tax as a result of a reduction in £2,500 of their personal allowance as they're gross income is now £105K vs £71,667 under the current regime (earned of £50K + rents of £55K after other deductible expenses less £33,333 finance cost = £71,667). Passing this on in rent increases to tenants will prove impossible (& unfair) even if rents aren't capped, or over the longer term rents will no doubt be kept low due to market forces by the big corporates charging low(er) rents, plus add to the fact there's more & more expenses being imposed on landlords eg licencing, new regulation etc. Also we can't naively ignore the fact that income tax rates will no doubt increase if Labour gain power for higher earners (which landlords under the 2017-2021 regime will be even if they aren't now). Even under the Tory's our tax has increased due to the income rate tax bands not having increased. Our battle is not just the current threat but the direction in which the wind is blowing. I'm fortunate enough to be an unencumbered landlord but I know there's a big battle ahead.
Question - the loss of the 10% Wear & Tear Allowance from 2016 seems to be widely accepted by everyone as I've seen little argument against this, but this begs the question whether a claim against a tenant's deposit for damage to eg a carpet will no longer be reduced by wear & tear to arrive at the amount that can be claimed? Any one know?

Reply to the comment left by "Ros ." at "04/10/2015 - 23:18":

Ah, but I am the process of remortgaging, repositioning my 'business' to allow for this stupid tax .....paying down (but not closing) a repayment mortgage, and replacing it with an interest only. The term is longer (at my age that's really important), I can fix it, whereas the repayment was variable, and I can take out enough cash to see me over a difficult period without increasing my payments.

What we need is more choice of mortgages, AND warnings from the brokers for those that are still not aware of the chaos that will be Clause 24.

Reply to the comment left by "Barry Fitzpatrick" at "05/10/2015 - 00:57":

Hi Barry,
Yes, the tax lowers the threshold at which the business is unviable - so in my case, with the current system there would need to be closer to a 4% increase in interest rates rather than a 3% increase to tip the balance. The big difference is that with the current system I would receive tax credits, free dental treatment etc., my children could still get student loans (as Lisa pointed out - I don't know much about this) etc. So I would have money to live on.At one point several years ago my income was low enough for me to receive tax credits.
Under the new regime we would be in a position where we are having to do all the work associated with our businesses - Trendo gave an excellent summary of this some time ago - if anyone can find it and re-post it that would be great and this time I'll save it in a document - so we would be doing all of that work, whilst having no income and if we have any savings or another job using all the money from those to effectively pay for people to live in our houses, until we ran out of money completely and went bankrupt and presumably at some point then, we would be entitled to the benefits everyone else gets for doing no productive work and/or providing no services to others. Indeed, we could well be cleaning up after and repairing the damage caused by some of our less pleasant tenants who have never worked....
NB. I do not, of course, foresee this as what will happen to me. I don't even think I'll end up in my dream, idyllic caravan on the coast. Like most others, I'm plotting and scheming to handle this in a super-positive and practical way behind the scenes - with a combination of rent increases, tightening up maintenance expenditure, expansion of liveable space, a few sales at some point and so on.
My points above are just about the logical consequences of Clause 24 if I took no evasive action. And for others they don't have the options or leeway I have.
And most importantly of all, as Lisa said, it is morally wrong to not allow us to put the finance costs as legitimate expenses. As if we could have bought houses without mortgages. How many people can do that? That's why mortgages bloody exist.
The Treasury issued that ridiculous statement regarding how landlords were able to buy more expensive houses because we could get mortgages! What about GO's nob friends who can buy more expensive houses than most landlords because they're loaded? Is that equally unfair? And my neighbour can buy a more expensive car because she's loaded? Must that be stopped as well? Looks like communism to me.

Reply to the comment left by "Mark Brown" at "05/10/2015 - 07:26":

@ Mark,

Here is the link to Ranjan Bhattacharya's report "Summer Budget 2015: The Property Investors SURVIVAL GUIDE "

https://gallery.mailchimp.com/e3d8c92af1835f8fe29f2d776/files/SUMMER_BUDGET_EMERGENCY_REPORT.pdf

Reply to the comment left by "Laura Delow" at "05/10/2015 - 08:55":

@Laura,

I am sorry but I have to disagree with your analysis:

You say: "eg if current finance interest is £20K pa on say £666,666 of total borrowing at a 3% interest rate averaged across all properties & the interest rate goes up to 5% = £33,333 pa in interest finance, your tax liability will increase too. Example; someone earning £50,000 pa from their properties after all deductions, can deduct a further £20,000 for the finance cost & assuming no other income from a day job, they currently pay £3880 in tax & enjoy a net income of £26,120. But by 2021 this will have reduced to £24,597 net income due to a rise in tax to £5403. Then factor in a 2% rise in interest rates over the next 5-6 years, this then reduces to a net income of £13,931 under the new regime."

I have plugged your example figures into Alex Caravello's spreadsheet (link at the top of this page). I agree 100% with your figures up until you increase finance rates by 2%. When (if all other things being equal) the tax due becomes £2,736 (down from £5,403) the 20% mortgage interest relief @ 20% goes up from £4,000 to £6,667 - I do agree under the new rules that the Nett Income falls to £13,931 but most of this fall is due to the higher interest payments made.

Please take a look at the screenshots I made here:
This is at 3%
http://www.buzzworks.co.uk/Screenshot-LauraDelow3percent.jpg

This is at 5%
http://www.buzzworks.co.uk/Screenshot-LauraDelow5percent.jpg

You go on: "If you then factor in an earned income source from a day job of eg £50,000 on top & assume a 5% rise in net rents to £55,000, their net income would be £61,597 under this current regime. Add to this a 2% rise in interest rates, their net income today of £61,597 would reduce under the new regime to £45,931. "
Yes - totally agree.