UK Landlord Forum / Life

What do people think?

How will this effect you?

As a smaller landlord, I figure this little stunt just cost me over £850 a year....

Just raise the rent. I'm sure you'll come up with a way of not losing-out.

As a new landlord I'm lost on this post lol. Has this got something to do with the new budget?

Yes it has,

Hi, I would be grateful if someone could explain this to me too, perhaps with a concrete example such as:
If I currently have 2 buy-to-lets, one with 120K mortgage that costs £400 per month interest only and the second with an 80K mortgage costing £250, the rents for the pair are £1600 per month and my annual income is £30K, how much would I now pay compared with before?

Thanks

As far as I am aware the new changes are that any interest on a loan used for your let property the amount of intreast you can claim back against tax is now a fixed amount of 20%.

Regardless what tax bracket you are in.

Also the 10% you can claim against tax for wear and tear on furniture is to be stopped.

That's what I make of the new changes but please someone correct me if my information is not right

Not "now"... the move to 20% will be phased in over a number of years and everyone will have time to adjust, or get out of the game (whatever they fancy).

Working out concrete examples is interesting only. All Landlords need to know is that this is not good for them if they have any mortgaged properties. It's really bad for them if you have interest only mortgages. Rest assured, HMRC's systems will be updated so when you do your self-assessments, it'll all become very clear. 

It's not the end of the world. I see it as some kind of encouragement for me to continue paying down any mortgages. My eventual aim has always been to have only unencumbered properties - this will help focus my mind. Eek!

Thanks hippogriff

Quote from: Hippogriff on July 14, 2015, 07:11:21 AM

Working out concrete examples is interesting only.

Many thanks for answer, some good points, but didn't understand the above sentence and still don't fully understand the financial implications except to say that it will cost me money.

Government policy paper is here

https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

Some explanation from this tax lawyer's brief

http://www.eversheds.com/global/en/what/articles/index.page?ArticleID=en/Tax_planning_and_consultancy/Real_Estate_Tax_Summer_Budget_2015-E-briefing_for_Landlords

Thanks Soton for the links, I think I finally understand, so here goes with an example:

Currently each month if the rent I charge is £750 and the interest I pay on the mortgage is £200 I can deduct the interest from the rent to determine my profits (obviously less any other maintenance costs) so £750 - £200 = £550 profit on which I pay tax. The new measures are being introduced gradually over a 4 year period with 75% in 2017-18, 50% in 2018-9 until we reach 20% in 2020-21. So the amount of interest with new 20% rule  I can deduct from the rent to determine my profit is £40 (20% of £200), so I'll be taxed on £750 - £40 = £710

What this all means is that for every £100 of mortgage interest you pay each month, only £20 can be deducted from your profits before tax, so you loose £80 of tax relief per month which over a year amounts to £960 worth of tax relief, which at the current tax rate of 20% will actually cost you £192 per year for every £100 per month you pay in interest charges, and obviously if you pay tax at a higher rate even more.

So thanks George!

Quote from: Pete on July 22, 2015, 04:29:58 PMWhat this all means is that for every £100 of mortgage interest you pay each month, only £20 can be deducted from your profits before tax, so you loose £80 of tax relief per month...

I'm not sure you have finally understood it.

A mortgage payment of £100 today would really cost a higher rate tax payer £55. Because that higher rate tax payer would pay tax at 45%, then that's the benefit to them. They are counting that interest as an allowable expense and it's expected to be 'counted' at the 45% rate (in reality it will be at whatever bracket you're in - for me it's 40% - so a mortgage interest payment of £100 really costs me £60.

When this is fully introduced by 2020 - 2021, if it is, then you won't be able to claim the interest as an allowable expense at your higher tax band rate, be that 45% or 40%, but only at 20% instead... so £100 of mortgage interest would really cost you (you, me, every Landlord) £80.

So the difference would be £20 per £100, for me as 40% rate tax payer. So I don't see how you're losing £80 of tax relief per £100 at all.

12 x £20 = £240? Are you sure you've not doubled-up or quadrupled-up somewhere to get to your £960?

Anyway... the solution? Not to panic... just raise the rent! Who will pay? The Tenants will pay.

Or - alternatively - have I got it wrong? Are we doomed?

I doubt it.

No hippo you have it right.

I am an ex qualified accountant, so this principal of restricting tax relief to BR is easily understood, but I have also had 30 years experience of seemingly intelligent people who cant grasp percentages.

Pay £100 interest. Now you can claim this against any profit.

Over time you will only be able to claim this as a profit "within" your 20% tax band.

So if you have £11,000 of earnings from PAYE, take this first ( as it will have your personal allowance,) nil tax.

£43,000 of interest from Post Office Bonds... Tax at 20% £8600.

£20,0000 of profit from property after paying £10,000 interest. Tax at 40%..£8,000..........BUT NEW RULES MEAN EXTRA £2000 TAX ( 20% x £10,000)

The rules for transitional relief.
75% year one. so only 75% can get 40% tax relief, so £2500 or 25% is "double taxed" so extra £500 ( 20% x £2500) etc etc

Quote from: boboff on July 28, 2015, 06:50:57 AMNo hippo you have it right.

Good. That pleases me.

I am not an ex-Accountant, but I once considered going on an AAT training course when I was about 16 and didn't know what I wanted to do with my life... it was either Accountancy or the Army.

In the end I chose IT.

I would add the following...

Not to sound cocky or anything like that... but my approach to being a Landlord has often been somewhat at odds with many traditional BTL investors... at odds in that, if I require a mortgage, then I always get a repayment mortgage and have the intention for all my properties to be unencumbered. This is the utopia for me. I would never consider an interest-only mortgage (even if it had the option of capital repayments) as the self-discipline required to pay off the capital can be hard to come by. I have always ensured that the rent incoming is > than the repayment mortgage + my expenses + some more - so it's a no-brainer and eventually I should end up with all the rent coming in and the expensive asset too. I also overpay whenever I can... that is the hardest thing to do when you've reconciled the overall approach in your mind, but overpaying is really efficient for you... the amount of time and interest saved from modest overpayments is often staggering.

My approach means that over time I would be hit less and less by a policy like this... whereas people with interest-only mortgages (who are choosing not to make capital repayments) will be hit to the maximum and keep getting hit to the maximum.

If you are uncomfortable with all this what may be coming, start to pay down your debt (unless it's a no-brainer that it's really good debt - which, of course, it can be).

Well we have exactly the same investment rules then.

They are good sound proper prudent and sensible.

A property investment HAS to pay it's own capital off over 20 years.

When this wasnt possible from 2005 - 2012 where I live, I stopped doing it.