New landlord tax rules for new debt only

A simpler way to look at it is for each £1 of extra interest (finance costs) you pay you will receive back 20p in tax relief. So your net cost is 80p.

What HMRC decide is your notional profit will not be affected by what interest rate you are charged.

Reply to the comment left by "Barry Fitzpatrick" at "23/07/2015 - 16:51":

Your comment has got me thinking more about the cost of borrowing, and possibly where the treasury is coming from (I’m not saying they are right).

I am a basic rate tax payer, and can probably jiggle things with my wife so that I stay that way.
Now, every £1 I pay in interest currently costs me 80p: I pay a pound; if I did not pay the interest, then I would have £1 more, but I would pay the tax man 20p, so I would have 80p more to spend; thus it has cost me 80p in real terms to pay the interest.

If I were a 40% rate tax payer (for this case, assume I hit 40% from my ‘day job’ and my gross lettings income does not take me into the weird tax territory above £100,000), then
every pound I pay in interest would cost me 60p.
As above, I pay £1; if I did not pay the interest, then I would have £1 more, but I would pay the tax man 40p, so I would have 60p more to spend; thus it has cost me 60p in real terms to pay the interest.

So, currently higher rate tax payers pay less in real terms to borrow the same amount of money as a basic rate tax payer.
It appears (to me) that this is what the treasury’s argument is and what it is trying to correct (i.e. for all tax payers to pay the same amount in real terms for £1 of interest).
The proposed change means that in the 40% case above I would pay 20p to the tax man, and it would have cost me 80p in real terms to pay the interest.

Reply to the comment left by "Michael Barnes" at "23/07/2015 - 17:30":

So Michael , how do you feel about your £1 that should cost you 80p suddenly only costing 60p (when it should really be 80p) then taking the 20p difference - just because , well they need to, from now on ..before you answer thae last piece of info is that you didnt have that £1 at the beginning they just pretended you had it.

..the taking of the 20p from the £1 that you didnt have to start with is not pretend tho, that is very real for many people under the new proposed "levy".

It’s a triple whammy!

If the reduced relief had not already pushed you into a higher tax band, then an added burden of e.g. 0.5% BOE rate rise on top might well do the job. For every £1 of interest cost previously, I would get £1 of relief, so would effectively avoid tax on £1 of rental income, and this would be worth 20p back from HMRC (as explained succinctly by Barry F), if I was in the 20% margin rate band. As Michael B says, it would be worth 40p back from HMRC for the 40% tax bands. So the disadvantage to 40% band taxpayers is twice as bad as for the 20% taxpayers, and it is even worse for the 45% tax payers (whammy!).

The effect of the whole exercise is to push more people for the 20% band to the 40% and 45% bands, so this makes the disadvantage even worse because you now pay a higher rate on income that you never saw in the first place (I think is what Simon R is getting at). That’s the double whammy.

What I was trying to say was that any extra burden just due to a BOE rate rise is even worse, because it will push yet more people in to the higher bracket, even with no extra rental income = triple whammy!

I don't think it's time to make concessions yet and talk externally about the retrospective idea. I think that is something to keep in the back pocket and I would want to say 'property purchases' as the words 'new debt' could be misinterpreted as 'new mortgages/re-mortgages.' We've had some powerful people apparently rubbishing the idea of this measure in a Treasury meeting with George Osborne present, I believe. I think if we keep up the letters and keep contacting everyone we can think of, bombarding them with our latest ideas and projections and personal stories, we can overturn this thing.

Reply to the comment left by "Richard Peeters" at "23/07/2015 - 18:17":

Peter

Please read the second part of the comment above which was posted by Barry Fitzpatrick because you seem to misunderstand that higher interest rates will not affect the HMRC's notional profit on which they calculate your tax.
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Reply to the comment left by "Ros ." at "23/07/2015 - 18:31":

I admire your optimism Ros but there is no point picking a fight we cannot win.

Can you honestly see George Osborne and Mark Carney doing a complete u-turn at this point? That could be politically more dangerous for the UK economy than the issue we are complaining about.
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Reply to the comment left by "Appalled Landlord" at "23/07/2015 - 15:55":

"The interest will not deducted from the rents received, so the rental profit will appear to be that much higher, by 100% of the interest. This higher profit is added to all your other income, then the tax is calculated by proceeding through the various tax bands."

Property is my full time business, so there is nothing like "all your other income", Sorry if I continue to misunderstand, but it does still seem to me that my major cost element (mortgage interest) is hitting that much harder without that extra 80% relief.

Reply to the comment left by "Richard Peeters" at "23/07/2015 - 21:12":

Hi Richard

I agree it does seem paradoxical. Your interest is 100k, say, which you paid to your lender. HMRC give you a discount of 20k from your tax due, so you must be 80k out of pocket.

At present the Chancellor would say you are getting tax relief on interest, and all your other costs, or anything up to 45%, depending on which tax band your income puts you in.

This is an artificial way of looking at costs.

We would deduct 100% of our costs from 100% of our rent to find 100% of our profit on which we would pay tax at anything from 0% to 45%.

His way of thinking is that you pay tax of x% of your rent, minus x% of your costs, leaving x% of the profit (which is equal to the tax due), where x% is your marginal rate of tax because of the tax band you are in.

He calls this x% of your costs a “relief”, and he is going to stop it applying to finance costs from 2017. Instead he will give “relief” at a fixed rate of 20% of finance costs; the “relief” is given by deducting it from the tax calculated on your income.

So if you are currently paying tax at 40% he would say you are getting “relief” at 40% on your finance costs. He will reduce this to 20%, so you will be out of pocket by 20% of your finance costs through paying extra tax. If you currently pay tax at 45%%, you will pay 25% of your finance costs through paying extra tax.

These amounts of extra tax will be a levy on your finance costs. You will pay 100k to your lender, and anything up to 25k to HMRC. It is as if your interest rate had gone up, but the increase will not go to the lender.

If you download the spreadsheet available at the top of this thread, and put in your share of the rental profit before finance costs on the second line on the Calculator worksheet where the red figures are, and the finance costs on the next line, it will calculate your tax under the current rules and the proposed rules. The difference between the two amounts of tax is your levy.

Reply to the comment left by "Appalled Landlord" at "23/07/2015 - 22:51":

Thanks AL, you've explained it beautifully, and I agree 100% (that's a relief!).

My point about the BOE rate rise was trying to address what you have touched on about the "extra tax" and "It is as if your interest rate had gone up, but the increase will not go to the lender".

When (not "if") the BOE base rate does go up, then the lenders may get a little of that increase, but the Treasury gets the extra interest plus even more extra tax (lack of relief).

I think I should stop now. 🙂