Budget 2015 Interest Tax Deduction Landords - Analysis of impact

phlash

Here is my analysis of the impact of the recent Budget announcements, and how it affects the Breakeven point for Landords.

The point of this blog is to explore the impact on how much a landlord can borrow, how much more tax is payable and how a lower rate taxpayer may end up paying higher are tax.

Link: http://www.comfortlettings.co.uk/blog/2015/08/29/budget-2015-buy-to-let-mortgage-interest-tax-consequences

Enjoy and I'll be happy to contribute to any clarification points.

Generali

Interesting piece and well written too.

The part I would have a problem with is this presumption that the example used is in any way typical. It looks to me like you've taken a particular income point which maximises the tax impact. I would guess that most BTL investors are top rate taxpayers.

chucknorris

At current levels of interest rates, the loss of the wear and tear allowance is more significant to us than the reduction of the mortgage interest allowed as a business expense. This is due to being mortgage free on some properties and having low margin tracker mortgages and a low average LTV ratio on the others. When the base rate reaches about 3.5% they will have equal impact on us. I'm hoping that some upward pressure on rents might eventually partially offset the financial affect on us.

Of course not everyone is in a good position as us, and the combination of both changes will have an immense impact on some landlords.

Generali

chucknorris wrote: »

At current levels of interest rates, the loss of the wear and tear allowance is more significant to us than the reduction of the mortgage interest allowed as a business expense. This is due to being mortgage free on some properties and having low margin tracker mortgages and a low average LTV ratio on the others. When the base rate reaches about 3.5% they will have equal impact on us.

Of course not everyone is in a good position as us, and the combination of both changes will have an immense impact on some landlords.

TBH, if what you have posted here is true I don't think you are an atypical LL.

Higher earner and risk averse (although I would argue that BTL is higher risk than many think).

phlash

Generali wrote: »

Interesting piece and well written too.

The part I would have a problem with is this presumption that the example used is in any way typical. It looks to me like you've taken a particular income point which maximises the tax impact. I would guess that most BTL investors are top rate taxpayers.

It's definitely a difficult one that, ie. Which example to lead with. There are of course many variables.

That is the reason why I have presented the impact over a range of income levels. There is of course the point that I could or should have modelled a single let house in the North, however I plumped for this as it fitted with a BTL investor in London and a BTL investor with 2-3 properties in the Midlands.

Hopefully the other graphs give an idea of the affect depending on income and the linked calculator allows you to see a personalised affect.

This really is a tax change that affects the younger buy to let generations, as they are more likely to be more highly geared.

The real point and driver of this type of analysis is to say... "Watch your debt levels, it would be sensible to pay these down".

chucknorris

Generali wrote: »

TBH, if what you have posted here is true I don't think you are an atypical LL.

Higher earner and risk averse (although I would argue that BTL is higher risk than many think).

It can be high risk in the early years (depending on how aggressively you borrow), and I agree that many probably do not appreciate the full risks that they take on. Although some have just found out the hard way (i.e. the budget changes).

It was high risk for me when I first entered the market, back in the early 90's. But I think the time to take risks is when you are trying to get somewhere (financially). Once successful, and you are happy where you are, I think it is better to consolidate, and protect what you have, rather than risk losing what you already have.

Generali

phlash wrote: »

It's definitely a difficult one that, ie. Which example to lead with. There are of course many variables.

That is the reason why I have presented the impact over a range of income levels. There is of course the point that I could or should have modelled a single let house in the North, however I plumped for this as it fitted with a BTL investor in London and a BTL investor with 2-3 properties in the Midlands.

Hopefully the other graphs give an idea of the affect depending on income and the linked calculator allows you to see a personalised affect.

This really is a tax change that affects the younger buy to let generations, as they are more likely to be more highly geared.

The real point and driver of this type of analysis is to say... "Watch your debt levels, it would be sensible to pay these down".

I'd probably post a second example of higher rate taxpayer that remains a higher rate taxpayer. Also perhaps an unleveraged example (more than half of properties in the UK do not have a mortgage attached to them). It would be worth testing leverage vs no leverage.

Maybe it would be worth backtesting the rules. E.g. if this law had come in to start in 2010 or 2012 what would be the impact if everything else had remained unchanged?

Finally, as you imply, there is no single housing market in the UK. Drivers of and returns from the market in Mayfair are very different to those in Macclesfield. Maybe it would be worth backtesting the numbers for different places to see what difference would be made to total returns.

I work as an analyst for an asset manager so I do a lot of these what if??? scenario pieces.

phlash

Generali wrote: »

I'd probably post a second example of higher rate taxpayer that remains a higher rate taxpayer. Also perhaps an unleveraged example (more than half of properties in the UK do not have a mortgage attached to them). It would be worth testing leverage vs no leverage.

Maybe it would be worth backtesting the rules. E.g. if this law had come in to start in 2010 or 2012 what would be the impact if everything else had remained unchanged?

Finally, as you imply, there is no single housing market in the UK. Drivers of and returns from the market in Mayfair are very different to those in Macclesfield. Maybe it would be worth backtesting the numbers for different places to see what difference would be made to total returns.

I work as an analyst for an asset manager so I do a lot of these what if??? scenario pieces.

I'm a Management Accountant, so also do a lot of 'what if' too, it's bread and butter.

The Blog is already very meaty, I can perhaps do some more examples and will think of a neat way to display.

Generali

phlash wrote: »

I'm a Management Accountant, so also do a lot of 'what if' too, it's bread and butter.

The Blog is already very meaty, I can perhaps do some more examples and will think of a neat way to display.

Downloadable spread sheet?

phlash

I would need to speak to my website guy about that one!

Thrugelmir

phlash wrote: »

This really is a tax change that affects the younger buy to let generations, as they are more likely to be more highly geared.

The real point and driver of this type of analysis is to say... "Watch your debt levels, it would be sensible to pay these down".

A market correction could easily leave many highly leveraged. Exposing them to the double whammy if the asset was non income bearing.

BTL as a model has been geared towards capital growth. Few borrowers have built on their empires on a self funding repayment model. The tax changes are significant. As reduces the attractiveness of the concept.

Given GO is committed to a level playing field across the taxation system. Doubt this will be the last measure to impact the sector. The length of time before full introduction will be interesting to monitor. Both from a lenders and borrowers perspective. Borrowers will act in a herd fashion. Once spooked will they stampede for the exit doors?