how does the budegt affect BTL?

martinsurrey

martinsurrey wrote: »

the article in your link is wrong.

mortgage interest relief will be limited to basic rate tax relief, not as the article suggests, which is that mortgage interest which can offset tax is limited to 20%.

the difference is that all interest will be allowed for tax, but the max reduction in tax you can get is 20% of that amount, so a basic rate tax payer loses nothing, but a higher rate tax payer gets taxed 20% of the total mortgage interest and an additional rate payer 25%

as an example,

mortgage interest of £7,500

rental income of £12,000

"profit" of £4500

Basic rate taxpayer pays £900 tax (20% of £4,500), net profit of £3600
Higher rate taxpayer pays £3,300 tax (12,000-7500/2)*.4 net profit of £1200

Innys1

martinsurrey wrote: »

as an example,

mortgage interest of £7,500

rental income of £12,000

"profit" of £4500

Basic rate taxpayer pays £900 tax (20% of £4,500), net profit of £3600
Higher rate taxpayer pays £3,300 tax (12,000-7500/2)*.4 net profit of £1200

Not sure I believe this calc - it implies the HR tax payer pays three times the tax compared to the BR tax payer and is taxed at 73% on their £4,500 profit...........

martinsurrey

Innys1 wrote: »

If they have a Ltd co with tens of thousands sitting around ready to buy the properties, you could be right. I somehow doubt it.

All in all, I doubt what you predict will come about big time, just to minimise the impact of cutting the tax relief from 40% to 20%.

nooooo,

they buy a shell ltd co for £200.

lend that company what ever equity they have in the property while the co simultaneously buys the property with a mortgage of the same size as the current one (guaranteed by the owner). the only cash costs are stamp duty + legal fees

the tax relief on a £250k 4% mortgage was £4k a year and is now £2k a year, so wont take long to break even in the ltd co.

Socksey

I can see rents going up if landlords are going to face larger tax bills.... joys.... maybe that's the plan....

Innys1

martinsurrey wrote: »

nooooo,

they buy a shell ltd co for £200.

lend that company what ever equity they have in the property while the co simultaneously buys the property with a mortgage of the same size as the current one (guaranteed by the owner). the only cash costs are stamp duty + legal fees

the tax relief on a £250k 4% mortgage was £4k a year and is now £2k a year, so wont take long to break even in the ltd co.

So the landlord already owns the property and sells it to the shell company................and what about CGT bill?

martinsurrey

Innys1 wrote: »

Not sure I believe this calc - it implies the HR tax payer pays three times the tax compared to the BR tax payer and is taxed at 73% on their £4,500 profit...........

currently
BR tax payer pays 20% of £4500 = £900
this can be broken down as follows
Income =£12,000
Tax on income @20% = £2400
Expenses =-£7,500
Tax relief on expenses @20% = -£1500

Tax paid = £2400-1500 = £900

HR tax payer pays 40% of £4500 = £1800
this can be broken down as follows
Income =£12,000
Tax on income @40% = £4800
Expenses =-£7,500
Tax relief on expenses @40% = -£3000

Tax paid = £4800-3000 = £1800

NOW if we limit that mortgage interest rate relief to basic rate we get the following

BR tax payer pays 20% of £4500 = £900
this can be broken down as follows
Income =£12,000
Tax on income @20% = £2400
Expenses =-£7,500
Tax relief on expenses @20% = -£1500

Tax paid = £2400-1500 = £900

HR pays £3,300 tax
this can be broken down as follows
Income =£12,000
Tax on income @40% = £4800
Expenses =-£7,500
Tax relief on expenses @20% due to mortgage interest relief limit = -£1500

Tax paid = £4800-1500 = £3300

simples

martinsurrey

Innys1 wrote: »

So the landlord already owns the property and sells it to the shell company................and what about CGT bill?

you will crystallise a CGT liability, which will need careful consideration for each property in a portfolio.

BUT, as a house with a large CGT liability can not have mortgage interest relief greater than the original purchase price, the effect of this change is limited in these cases (as in the house is mainly financed through equity gains, and less through mortgage)

ianclapham

Basic taxpayers quickly become higher rate payers if you add back interest. I have looked at the numbers on this, and I find it shocking. Take a landlord with 100k rents, and typical 80k interest, 10k other costs, so a net income of 10K. Covered by the personal allowance, so no tax to pay. If we remove the interest, which unfortunately is all too real a cost, and usually the dominant cost in a BTL business, then the fictional "taxable income" is 90k. Tax payable after 20% interest relief will be 9.4k, or 94% of the actual net income! This is more like business destruction than business taxation.

Innys1

martinsurrey wrote: »

currently
BR tax payer pays 20% of £4500 = £900
this can be broken down as follows
Income =£12,000
Tax on income @20% = £2400
Expenses =-£7,500
Tax relief on expenses @20% = -£1500

Tax paid = £2400-1500 = £900

HR tax payer pays 40% of £4500 = £1800
this can be broken down as follows
Income =£12,000
Tax on income @40% = £4800
Expenses =-£7,500
Tax relief on expenses @40% = -£3000

Tax paid = £4800-3000 = £1800

NOW if we limit that mortgage interest rate relief to basic rate we get the following

BR tax payer pays 20% of £4500 = £900
this can be broken down as follows
Income =£12,000
Tax on income @20% = £2400
Expenses =-£7,500
Tax relief on expenses @20% = -£1500

Tax paid = £2400-1500 = £900

HR pays £3,300 tax
this can be broken down as follows
Income =£12,000
Tax on income @40% = £4800
Expenses =-£7,500
Tax relief on expenses @20% due to mortgage interest relief limit = -£1500

Tax paid = £4800-1500 = £3300

simples

Still not convinced about this - the tax you have calculated above is before expenses are deducted, i.e. the £12,000, not the £4,500 net inome. Is that correct?

This is borne out by Ian's posting after yours where he reckons taxable income, in his example, is 90k, i.e. after other expenses have been paid.

martinsurrey

Innys1 wrote: »

Still not convinced about this - the tax you have calculated above is before expenses are deducted, i.e. the £12,000, not the £4,500 net inome. Is that correct?

This is borne out by Ian's posting after yours where he reckons taxable income, in his example, is 90k, i.e. after other expenses have been paid.

yes, my example doesn't include any other expenses as they are not effected by the change.

If it would make you feel any better, in my example replace income of £12,000 with income of £14,000, less other expenses of £2,000 giving a net income before finance costs of £12,000 the rest of the numbers follow.

This is because on other expenses everybody gets full marginal rate tax relief