Summer Budget 2015 – Landlords Reactions

While we are sharing here is the reply that I got from Megan regarding the use of the word "profit" in the second clause of how your tax relief will be worked out (I thought/panicked they might mean actual profit rather than taxable profit). I got this Sunday evening and posted the conclusion on this thread. Reading it again (specifically paragraph 3) it would seem Megan does not follow Gary Mason's style of calculating the tax (and I am happy to forward this email to Mark for verification!)

Many thanks for your email.

Yes, it's taxable property profits.

The change is to restrict the deduction (for tax purposes) for finance costs that the landlord receives when calculating the taxable property profits and instead to give a deduction from their income tax liability for (in most cases) 20% of the finance costs.

The deduction from the tax liability is based on taxable property profits (not including a finance cost deduction) where they are lower than the finance costs, so that the deduction is not given against other sources of income.

Jason

I have been analysing and extrapolating the figures in the example provided by Megan Shaw, Product Owner – Property Income & REITs, HMRC, which Syed posted on page 48: http://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-48/#comment-58439

One property
For simplicity, let’s assume these are the figures for a single property. His real rental profit, as we would understand it, is £1,200. The extra tax that he would pay in 2020/21 is £1,800, which is 50% more than the rental profit. He would literally be better off without it.
His net income (ignoring NI contributions) would go down from £35,160 to £33,360. This is HMRC’s own example of a small landlord being pushed into the 40% band. Ms Shaw says in her email “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.”
Today the tax he pays on his total real income is 14.7%. In 2020/21 it would be 19.0%, 4.3 percentage points higher.

Two properties
If he had two properties with identical figures, the real rental profit would be £2,400. The extra tax that he would pay in 2020/21 is £4,200, - 75% more than the rental profit. His net income (ignoring NI contributions) would go down from £36,120 to £31,920.
At this point his extra tax is 19.4% of the finance costs.
Today he would still be in the 20% band, and the tax he would pay on his total real income would be 14.8%. In 2020/21 it would be 24.7%, 9.9 percentage points higher.

Four properties
If he had 4 properties with identical figures, the real rental profit would be £4,800. The extra tax that he would pay in 2020/21 is £8,640, or 80% more than the rental profit. His net income (ignoring NI contributions) would go down from £37,680 to £29,040.
Today he would exceed the 20% band by £1,800, but the tax he would pay on his total real income would still only be 15.9%. In 2020/21 it would be 35.2%, 19.3 percentage points higher, and more than double.

It is clear that the more properties he has, the poorer he will be.

It is important to understand the calculation - if only to be accurate when canvassing MPs.

The government clearly wants to take the political stance of restricting 'tax relief' for landlords and whilst we should canvas our MPs on this very point that may be be a difficult decision to reverse.

Letters should not refer to adding finance costs onto income. It feels that is what is effectively happening but if you say that in your letter ...expect a stock response from your MP saying you have misunderstood and they will refer you to seek advice from an accountant. (I won't dwell on that 50 page debate)

However a fundamental issue which I think everyone is now clear on is that the methodology of calculating 'taxable profit' is changing ie finance costs are not deducted in the first place. That has potential impact for ALL landlords regardless of tax status,

So from 2021 I earn a much higher taxable profit.
1) can I buy a massive home for myself based on this profit?
2) How does this affect anyone making Child Support payments?
3) It pushes basic rate payers into higher tax bands.
4) very modest total rental incomes for people on very low total incomes may impact means tested benefits
5) For Higher Rate tax payers it is possible to pay tax even where the costs (including finance costs) are in deficit.
6) many others...etc etc

None of this was mentioned in the budget as an objective of the proposal and it is this point that needs to be addressed.

I will focus on these points in addition to the general principal of it feeling very unfair for the numerous reasons already covered in the forum.

Good luck.

Reply to the comment left by "Appalled Landlord" at "15/07/2015 - 21:06":

Thank goodness for this then, see link below ....

Thanks Phil, please publish your letter here when it is finished
.

im having a few issues i know how the calculation is calculated from megan shaw email ie, rental - maintenance costs = amount to be taxed on , then subtracted by 20 percent of finance costs could some one please give me the calcs on the following, in my estimate tax payable should be just less than 2k

rent is £90,000
finance mortgage interest £60000
maintenance cost £30000

Please could someone work out the tax payable at the end as in year 2021 when full effect of the new regulations comes in place. estimate is fine.
Thanks everyone

Reply to the comment left by "syed shah" at "15/07/2015 - 23:57":

My spread sheet says that assuming no other income you paid zero tax under the old regime and £3400 under the new.

This is a different figure from what you thought so I looked at the guts of the spread sheet to see why. It's choosing not to calculate your tax relief on £60K but your income - personnel allowance (i.e. no other income, 60K interest - 11K personal allowance is £49K which is the lesser of the three options). This is my interpretation of "income" in the 3 clauses (if it was "actual income" rather than "taxable income" then we really are screwed!).

If you want a pluck a figure for income out of the air and see if that helps by all means provide

Jason

On page 2 of HMRC’s explanatory document, under the heading “Summary of impacts” it says “It is expected that 1 in 5 individual landlords will receive less relief as a result of this measure.” I find that hard to believe, judging from HMRC’s own example.

Any landlord with a total income of over £43,000 will be affected. In their own example, someone with a salary of £40,000 and possibly a single property, say in London, is pushed into the trap.

Others with lower salaries, or pensions, but with two or three properties, will also be caught.

Those worst affected will be full-time landlords without a salary or pension who can currently make a living from rental profits alone.

Reply to the comment left by "syed shah" at "15/07/2015 - 23:57":

Hi Syed

Currently your rental income is nil. In 2020/21 it will be £60,000.

If you have no other income I calculate that you will pay tax of £1,200 as follows (rounding up the current bands to the nearest thousand):

£11,000 at the nil rate, £32,000 at 20% (£6,400) and the remaining £17,000 at 40% (£6,800), making total tax £13,200, less relief of £12,000 (£60,000 x 20%).

Hey everyone. Get on the other thread too, where we are supposed to be talking tactics, posting our letters we are sending to MPs and so on.
I've just left a message on the RLA website, urging them to start a petition, but someone here may have a better way of getting them to do it, if they know the people there.