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  • FIRST POST
    • marcusjames
    • By marcusjames 11th Oct 17, 1:31 PM
    • 46Posts
    • 15Thanks
    marcusjames
    Question on BTL mortgage relief
    • #1
    • 11th Oct 17, 1:31 PM
    Question on BTL mortgage relief 11th Oct 17 at 1:31 PM
    I think I understand the policy change regarding relief on mortgage interest on BTLs, but I'm confused about how this falls within income tax brackets.


    Does the 20% relief get applied prior to calculating a pre-tax profit? In some examples it appears to show that tax is calculated and then 20% is added back. This would make a difference when the profit figure pushing income about the marginal higher tax bracket.


    Thanks
Page 1
    • martinsurrey
    • By martinsurrey 11th Oct 17, 2:34 PM
    • 3,225 Posts
    • 3,927 Thanks
    martinsurrey
    • #2
    • 11th Oct 17, 2:34 PM
    • #2
    • 11th Oct 17, 2:34 PM
    I think I understand the policy change regarding relief on mortgage interest on BTLs, but I'm confused about how this falls within income tax brackets.


    Does the 20% relief get applied prior to calculating a pre-tax profit? In some examples it appears to show that tax is calculated and then 20% is added back. This would make a difference when the profit figure pushing income about the marginal higher tax bracket.


    Thanks
    Originally posted by marcusjames
    you work out the income and tax due and THEN take out mortgage interest relief from your tax bill.

    In effect it pushes you up tax bands.


    Example

    property tycoon A has rental income of £200k with mortgage interest payments of £160k

    net income £40k

    old system

    net income £40k

    income tax due = income tax paid = £5698 (FY17/18)

    net profit after tax £34,302

    new system

    Income liable to tax £200k

    income tax liability = £75,800
    less mortgage interest relief = £32,000
    tax paid = £43,800

    net LOSS after tax = -£3,800
    • 00ec25
    • By 00ec25 11th Oct 17, 4:02 PM
    • 5,573 Posts
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    00ec25
    • #3
    • 11th Oct 17, 4:02 PM
    • #3
    • 11th Oct 17, 4:02 PM
    have you read the explanation and examples provided?

    https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

    ignoring the transition period up to 20/21 for the sake of simplicity, the final position is that the interest is ignored when working out the taxable profit. That profit is then added to your other income to give the total taxable figure on which you will be assessed for what tax band you fall in. You will then calculate the tax due on that, and from that tax figure the tax relief is deducted as 20% of the interest charge.

    as explained in the guide above, for a basic rate taxpayer that means the end result is the same, no increase to tax paid. However, for those close to the higher rate threshold they will be pushed into it because their taxable income is higher and thus end up paying more tax as they will only get relief at 20%
    Last edited by 00ec25; 11-10-2017 at 5:20 PM.
    • Pennywise
    • By Pennywise 11th Oct 17, 4:39 PM
    • 9,428 Posts
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    Pennywise
    • #4
    • 11th Oct 17, 4:39 PM
    • #4
    • 11th Oct 17, 4:39 PM
    as explained in the guide above, for a basic rate taxpayer that means the end result is the same, no increase to tax paid. however, for those close to the higher rate threshold they will be pushed into it and thus end up paying more tax
    Originally posted by 00ec25
    Yes, the new rules mean your "income" is now far higher which may impact increased student loan repayments, loss of benefits, liability for repaying child benefit if "gross" income over £50k, liable for loss of personal allowance if taxable income over £100k, etc. Quite nasty when you follow through the figures as to the potential implications.
    • Cotta
    • By Cotta 11th Oct 17, 4:47 PM
    • 2,514 Posts
    • 992 Thanks
    Cotta
    • #5
    • 11th Oct 17, 4:47 PM
    • #5
    • 11th Oct 17, 4:47 PM
    you work out the income and tax due and THEN take out mortgage interest relief from your tax bill.

    In effect it pushes you up tax bands.


    Example

    property tycoon A has rental income of £200k with mortgage interest payments of £160k

    net income £40k

    old system

    net income £40k

    income tax due = income tax paid = £5698 (FY17/18)

    net profit after tax £34,302

    new system

    Income liable to tax £200k

    income tax liability = £75,800
    less mortgage interest relief = £32,000
    tax paid = £43,800

    net LOSS after tax = -£3,800
    Originally posted by martinsurrey
    So effectively you can never make a profit on a buy to let property?
    • 00ec25
    • By 00ec25 11th Oct 17, 5:17 PM
    • 5,573 Posts
    • 4,975 Thanks
    00ec25
    • #6
    • 11th Oct 17, 5:17 PM
    • #6
    • 11th Oct 17, 5:17 PM
    So effectively you can never make a profit on a buy to let property?
    Originally posted by Cotta
    you are sort of right, if you are VERY highly geared it is, as you say, hard to make a net profit since you are paying out a lot of interest without getting tax relief on it. If you have low gearing it may or may not result in little or no profit, depends on your figures!

    that is precisely the objective behind the tax change, it forces people who were relying on ever expanding BTL portfolios funded on debt to revise their ways
    • martinsurrey
    • By martinsurrey 12th Oct 17, 8:17 AM
    • 3,225 Posts
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    martinsurrey
    • #7
    • 12th Oct 17, 8:17 AM
    • #7
    • 12th Oct 17, 8:17 AM
    So effectively you can never make a profit on a buy to let property?
    Originally posted by Cotta
    You can, but its much harder, as a sole trader, on any sort of scale.

    but say for example you own 4 properties renting out for £900 a month, no other income, this tax change will have zero effect on you regardless of gearing as your new "income" of £43.2k is still below the higher rate tax threshold.

    the higher the gearing and the higher the income the harder it gets.

    Trade as a LTD company and its still just as easy on any scale.

    that is precisely the objective behind the tax change, it forces people who were relying on ever expanding BTL portfolios funded on debt to revise their ways
    Originally posted by 00ec25
    yup, start trading as a LTD!
    • Brighty
    • By Brighty 12th Oct 17, 8:36 AM
    • 730 Posts
    • 379 Thanks
    Brighty
    • #8
    • 12th Oct 17, 8:36 AM
    • #8
    • 12th Oct 17, 8:36 AM
    I have a very low gearing and it has no effect on me whatsoever at the moment. It pushes me slightly nearer the higher tax threshold, but not over it. So it is possible to make a profit on BTL, you just need to own the property yourself, rather than the bank
    • 00ec25
    • By 00ec25 12th Oct 17, 9:33 AM
    • 5,573 Posts
    • 4,975 Thanks
    00ec25
    • #9
    • 12th Oct 17, 9:33 AM
    • #9
    • 12th Oct 17, 9:33 AM
    yup, start trading as a LTD!
    Originally posted by martinsurrey
    indeed, but preferably not using property you already own which the company must therefore buy from you, gets rather taxing doing that
    • Pennywise
    • By Pennywise 12th Oct 17, 10:12 AM
    • 9,428 Posts
    • 17,152 Thanks
    Pennywise
    yup, start trading as a LTD!
    Originally posted by martinsurrey
    But you can't get the same level of borrowings and will have higher interest costs as you'll need a commercial loan/mortgage rather than a far cheaper/easier BTL loan.

    So, you'd have lower gearing by default, i.e. you'd never get anywhere near 90% LTV with a company loan - probably more like 60%/75% if you're lucky. You'd also have higher arrangement fees and higher interest rates. So, yes, you get better tax relief, but you also have higher costs!

    Not to mention higher "exit" taxes, i.e. full corporation tax on profit when you sell each property, no lower 10% CGT rate, no personal annual CGT exemption, no scope for main residence relief nor lettings relief if you live it in for part of your ownership period. Then you have double tax when you eventually close down the company and are taxed upon removing the funds from the company.

    So, when you do the sums, it's not quite as simple and isn't really a valid comparison.
    • Cotta
    • By Cotta 12th Oct 17, 3:21 PM
    • 2,514 Posts
    • 992 Thanks
    Cotta
    Interesting discussion, I suspect many BTL LLs will now just sell up.
    • martinsurrey
    • By martinsurrey 12th Oct 17, 3:23 PM
    • 3,225 Posts
    • 3,927 Thanks
    martinsurrey
    But you can't get the same level of borrowings and will have higher interest costs as you'll need a commercial loan/mortgage rather than a far cheaper/easier BTL loan.

    So, you'd have lower gearing by default, i.e. you'd never get anywhere near 90% LTV with a company loan - probably more like 60%/75% if you're lucky. You'd also have higher arrangement fees and higher interest rates. So, yes, you get better tax relief, but you also have higher costs!
    Originally posted by Pennywise
    I agree 75% is the upper end, and rates are not as good, but the number do add up if you have a large portfolio

    lets assume you have a 10 property portfolio, at 75% LTV, £200k properties rented out for £1000 a month.

    you can get a 3.19% 3 year LTD fix
    you can get a 1.69% 3 year solo fix

    total on mortgage = £1,500,000

    LTD interest = £47,850
    Solo interest = £25,350

    total rental income £120k

    solo tax
    Tax due before mortgage rate relief = £40,696
    Mortgage relief = £25350*20% = £5,070
    tax due £35,626
    cash in pocket = £59,024

    company tax
    Taxable profit £72,150 less £10k salary = £62,150
    Corp tax at 19% = £11,808

    Cash in company = £50,342

    Dividend an additional £37,000

    repay £13,342 of the capital you injected into the company (the 25% LTV you provided as a loan to the company, you could even charge some interest, tax free, and the director loan of £500k would support this withdrawal strategy for ~20 years.

    Tax due
    no income tax on the salary, and £32k of the dividend is taxed at 7.5% (£5k tax free) so £2400 income tax due

    cash in pocket = £10,000+£13,342+£37000-£2400= £57,942

    not a huge difference to the solo investor, and thats accounting for the mortgage interest rates.

    Not to mention higher "exit" taxes, i.e. full corporation tax on profit when you sell each property, no lower 10% CGT rate, no personal annual CGT exemption, no scope for main residence relief nor lettings relief if you live it in for part of your ownership period. Then you have double tax when you eventually close down the company and are taxed upon removing the funds from the company.
    Originally posted by Pennywise
    10% CGT rates do not apply to residential property transactions.

    annual allowance is peanuts in the long term scheme of things.

    you are also ignoring indexation allowance in a company.

    as we are talking about serious BTL I do not consider letting relief or PPR as serious options, as a lot of the properties BTL owners own are not ones they would want to live in.

    so in 20 years time property prices have quadrupled, RPI has increased by 250% (so real HPI of about 60%)

    the above houses are now worth £800k each (£8m total), you sell one per year

    personal tax due on the first sale
    you are still a higher rate tax payer from the other 9 properties (assumed that everything has risen with RPI, rents, tax bands) so you pay CGT at 28%

    CGT = (800-200)*28% = £168,000

    cash in pocket = £632k - mortgage = £482k

    Company tax due

    Corp tax = (800-200*2.5)*19% = £57,000

    Cash in Company = 800-57-150 = £593k

    now the clever bit, if tax bands have kept up with RPI (250%) we have a tax free allowance of £28k, and a basic rate band of £80k and a tax free dividend allowance of £12.5k

    In the company you can PLAN the tax exit strategy unlike with the owned house.

    you give 1/2 of your shares to your wife, they can extract upto £130k per year for about £6k tax per year (given inflated tax bands), you can keep the cash in the company and extract it once the company has wound down (so no rental income), giving you a really tax efficient pension provision.

    for instant access, owning outright might be better, but given the tax planning opportunities of a LTD you can REALLY cut your tax bill down.

    So, when you do the sums, it's not quite as simple and isn't really a valid comparison.
    Originally posted by Pennywise
    When you do all the sums, it really is a valid comparison, which is why a lot of the serious players are already LTD.
    • davholla
    • By davholla 13th Oct 17, 1:21 PM
    • 482 Posts
    • 89 Thanks
    davholla
    So effectively you can never make a profit on a buy to let property?
    Originally posted by Cotta
    You can if use cash, which is what they are trying to encourage.
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