how does the budegt affect BTL?

Innys1

Two can play at that game - I was exasperated at your posting. See how easy it is?

silvercar

Winrick wrote: »

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Under the old/current system this reduced the effective mortgage rate paid by BTL landlords from x% to x(1-marginal tax rate)%. The nex system means it is now x(1-20%tax rate)%. Assuming the landlord had a mortgage rate of 3% before tax and was a 40% tax payer, it was really 1.8% after tax. Now it will be 2.4% instead

This is what I assumed the budget change meant.

silvercar

Innys1 wrote: »

There's more bad news - or good, depending on your point of view. The 10% wear and tear allowance is being discontinued:

http://www.moneysavingexpert.com/news/mortgages/2015/07/summer-budget-2015-buy-to-let-landlords-hit-by-reduced-tax-breaks?_ga=1.252529481.1504906992.1415399208

Looks like a fair few BTL landlords are going to have to think twice, especially accidental ones or those who climbed aboard the bandwagon recently.

It will be based on actual expenses incurred instead, so it will be fairer - even if harder to calculate.

loafer999

I understand Tan's confusion, as I've read all this and still don't get it. Surely up until now ALL interest was tax deductible wasn't it? Ignoring all other allowable expenses, say I had £10,000 in rental income and £1000 mortgage interest that would leave £9000 that would be taxed at my tax rate, so 20% or 40% depending what bracket I was in. This is pretty much what the official gov.uk site says: /renting-out-a-property/paying-tax

So I can see that if I was a high band tax payer, I was technically getting a 40% tax break on the interest. But now George is saying the tax break will be reduced to 20% for everyone, which is what it would have been for low rate tax payers already?

Presumably it will no longer be an allowable deduction and will have to be worked out some other way?

Innys1

silvercar wrote: »

It will be based on actual expenses incurred instead, so it will be fairer - even if harder to calculate.

It's not hard to calculate - landlords just need to keep receipts.

As it happens, at present landlords have the option of the 10% or claiming the receipts. That choice is just being removed.

Innys1

loafer999 wrote: »

I understand Tan's confusion, as I've read all this and still don't get it. Surely up until now ALL interest was tax deductible wasn't it? Ignoring all other allowable expenses, say I had £10,000 in rental income and £1000 mortgage interest that would leave £9000 that would be taxed at my tax rate, so 20% or 40% depending what bracket I was in. This is pretty much what the official gov.uk site says: /renting-out-a-property/paying-tax

So I can see that if I was a high band tax payer, I was technically getting a 40% tax break on the interest. But now George is saying the tax break will be reduced to 20% for everyone, which is what it would have been for low rate tax payers already?

Presumably it will no longer be an allowable deduction and will have to be worked out some other way?

That isn't what Tan was saying. They were saying that BR tax payers were somehow being disadvantaged by the change when, in fact, they were unaffected.

As it happens, your understanding was the same as mine but that seems to be incorrect. To be honest, I can't be bothered to do the maths any more.

marshall666

loafer - you've got it correct, apart from the last statement - I think it will be calculated as Martin has demonstrated.

I was confused by martin's working, but it does clarify how the relief works:

Currently the tax relief on interest matches the tax rate - so the net result is that there's no tax due on interest.

The tax relief on interest will now be limited to 20%, so if you were paying 20% tax then relief will still match the tax rate, and the net result is still no tax on the interest.
If you are paying 40% then you will have to pay 40% less the relief of 20%, with a net result of 20% tax on the interest. if you pay 45% then net result is 25% tax on interest.

This is much rosier than what I initially thought, which is that everyone will be paying basic rate tax on interest, but higher rate will be limited to paying only 20%!
Edit:
I think the article is still wrong. It is saying that on 20,000 rental income with 10,000 being interest, "profit" is 10,000 (20k-interest) and tax relief of 20% is applicable to the profit of 10000:

As an example, currently a landlord rents out their property for £20,000 a year. For ease of explanation, the only expense they claim is all of their mortgage interest – which costs them £10,000 per year. This would leave them with a ‘profit’ of £10,000 per year, on which they would be able to claim tax relief of £4,000 (assuming they are a higher-rate 40% taxpayer).

Actually, using the interest to calculate profit is the tax relief. They will have to pay 40% tax on the profit of £10k, i.e. £4k.

jamesd

Yes, the example in the story appears to be utter rubbish that has no understanding of the effect of deducting expenses. Some weird idea that it's the after expenses money that it calls "profit" on which the relief is being given when it's the deduction of the expenses that gives it.

Landlords aren't going to subsidise their tenant housing costs by paying what is in effect the tenant's mortgage interest, so rents will either go up by the increased tax bill or landlords will use companies as a requirement of the market to have competitive rents.

Thrugelmir

Innys1 wrote: »

You have nothing to worry about then. It only affects those who pay 40% tax and have BTL income.

This is the first step of a gradual policy. Given the illiquidity of property. There'll be plenty of notice of changes.

Scarlets_mum

I am completely confused by this.
We have a BTL and using the figures already discussed say income £20k and interest of £10k giving a profit of £10k. As a higher rate tax payer we have then paid tax on the £10k ie £4,000. Have we been doing it wrong? Should we have been claiming relief on the interest ie paying tax on £6000 (£10k profit less Tax relief of £4k ie 40% of of interest of £10k) giving a bill of £2400. (6000 x 40%)

Feeling very confused and sorry if I have repeated other posts but its not clear to me!

Thanks all