Piggybank News

August 7, 2015

An illustration of how the new tax rules on mortgage interest will affect BTL landlords.

Filed under: Property — nspresources @ 5:36 pm

Now I’m not going to apologise that this is blatent plagarism because I think it’s the best explanation of how the new tax legislation will affect landlords that I have seen, but unfortunately is several scrolls down the page.  I don’t want you to miss it! So I am copying and pasting here and will paste link to the whole page below.  Thanks to James Davies of UPad for starting this thread and to Roger R for coming up with such a great illustration.  It is fairly long but please bear with it and read to the end.

FROM HMRC:
After April 2020 (when the restriction will be fully implemented) landlords that incur interest (and other associated finance costs) on residential properties that they let will need to calculate their tax differently. You will no longer be able to deduct interest from your rental income to arrive at your taxable profits, you will instead receive a reduction from your income tax liability equivalent to 20% of those interest costs. 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. Please see the example below:

Before Restriction (16-17) £   (ie now) After restriction (20-21) £
Salary 40,000      Salary 40,000
Property income 15,300 Property income 15,300
Less Other costs (3,300) Less Other costs (3,300)
Less Finance costs (10,800) Less Finance costs (0)
Property profits 1,200 Property profits 12,000
Taxable income 41,200 Taxable Income 52,000
Less Personal Allowance (11,000) Less Personal Allowance (11,000)
Tax due on 30,200 Tax due on 41,000
Tax at 40% 0 Tax at 40% 3,600
Tax @ 20% 6,040 Tax @ 20% 6,400
Total Tax 6,040 Total Tax 10,000
  Less Finance Costs @ 20% (2,160)
Final Tax 6,040 Final Tax 7,840

You need to look a little further to get the end result which is not good at all. Using HMRC own example:

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.

 Summary – using HMRC’s own example – real profit on BTL property =£1200 Tax due =£1800 (more due to new measures)  – £600 is what it will personally cost to run this BTL scenario. That is a LOSS to anyone who hasnt got it yet.

If you want to read the original post and all responses please follow the link below:

http://blog.upad.co.uk/blog/what-will-the-reduction-in-mortgage-interest-relief-mean-for-my-tax-bill

Advertisements

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

%d bloggers like this: