How could Buy to Let Landlords pay more than 140% tax on rental profits?

How could Buy to Let Landlords possibly pay more than 140% tax on rental profits?

Lets look at two scenarios

First one

Jim who is a teacher and is a 40% tax payer.

He has worked hard all his life and he bought a property  a long time ago as an investment to help with his retirement.

Over the years Jim has been able to reduce his mortgage to a relatively low level

He has heard about the new proposals to tax landlords, but thinks it is simply that he wont get as much higher rate mortgage relief. We explained to him that actually the rules affecting landlords have changed drastically

Apart from significant changes to what repair costs can be claimed as "allowable costs" against rental income, the significant change is that from April 2017 tax relief will be restricted, so that by 2020 interest will no longer be an "allowable expense" to offset against rental profits - it will only attract 20% tax relief.

 The change will happen gradually:-

 

 

2016/17

2017/18

2018/19

2019/20

2020/21

Allowable interest %

100

75

50

25

0

% of interest given 20% relief

0

25

50

75

100

Effective interest deduction allowable

100

80

60

40

20

 

Unless you have little or no mortgage, in 2020 your investment will no longer be worthwhile unless it is making massive capital gains, which is unlikely.

Let's  look at Jim's figures and the impact of the changes, which mean he will now effectively be taxed at 53.5% instead of 40% on his rental profits.

 

Jim the teacher

 

2016/17

2020/21

Rental Income

 

7200

7200

Deductible repairs etc

 

-1000

-1000

Mortgage interest

 

-2500

-

Rental "Profit" (adjusted in 2020/21)

 

3700

6200

 

 

 

 

Tax at 40%

 

1480

2480

Restricted interest relief at 20%

 

-

500

Tax payable

 

1480

1980

 

 

 

 

Tax Increase

 

 

500

 

 

 

 

Effective tax rate on "real" rental profit

 

40%

53.5%

 

 

Now lets imagine Jim in a different scenario.

 

He married Jean a nurse, and after a few years they did what a lot of people did in the eighties and nineties.

They decided life was too short. They were working long hours and hardly saw each  other, so they decided to change their lives and first went part time and eventually gave up employment to run a modest property business full time. This meant they could see more of each other and devote more time to their family.

They worked about 40 hours a week in the business, but did not take out a lot for themselves as they ploughed back much of their profit into building up their property portfolio to provide for their retirement. To do so, they took risks and borrowed money at a time when interest rates were much higher than they are now.

 

So lets look at what happens to them with the new rules

 

Jim and Jean - the property business

 

2016/17

2020/21

Rental Income

 

600000

600000

Deductible repairs etc

 

-200000

-200000

Mortgage interest

 

-350000

-

Rental "Profit" (adjusted in 2020/21)

 

50000

400000

Less Personal Allowances (x 2 taxpayers)

 

22000

-

Taxable Income

 

28000

400000

 

 

 

 

 

Tax at basic rate 20% (x 2 tax payers)

 

5600

17200

Tax at 40%

 

-

85600

Tax at 45%

 

-

45000

Sub total - tax payable

 

5600

147800

Restricted interest relief at 20% on £350000

 

-

70000

 

Tax payable

 

5600

77800

 

 

 

 

Tax Increase

 

 

72200

 

 

 

 

Effective tax rate on "real" rental profit

 

11.2%

144.4%

 

So despite providing for their futures and being successful in building up a bigger property portfolio to provide for their retirement and to help their family not to be a burden on the state, they have now had their lives turned upside down by the government, and feel they have little alternative other than to sell their properties, because they cant afford to be taxed at 144.4%.

 

However, if they do sell, and others like them make the same decision, they are terrified that the property prices will crash and they will end up bankrupt, because of this astonishing decision by government to effectively retrospectively tax them for being cautious, prudent and for providing good quality housing to their tenants, at a time when that housing was so desperately needed because very few could get a mortgage.

 

What would you think if you were Jim and Jean?

 

Do you think this is worth complaining to your MP about - do you think they are even aware of the implications?

 

We in OBC are not only fearful for our landlord clients who we feel are being abused in a very shabby fashion by George Osborne and his cronies in the treasury, but we also fear that this move might be the trigger to set off a cataclysmic economic crash  that we have all been working so hard to avoid since the last banking crash in 2008

 

Well we have shown you the figures - we cant take action for you - only you can speak to your politicians

 

If you do nothing don't moan to us, if a crash does occur - we will already be hiding in a bunker somewhere protecting what meagre assets we have left.

What can you do about it?

There are possible solutions, but if the government are attacking this particular industry, any step you take might still end in disaster.

If you do not want to sell, then you might need to see if you can incorporate your properties, but only if they can be seen to be a proper business - it is not straight forward, but you need to take advice sooner rather than later

We will post more blogs on this topic but we are going to be watching the autumn statement with interest

 

Mike Ogilvie - OBC The Accountants

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