New landlord tax changes

OhSoStupid

Hi everyone, I am hoping there is someone out there who understands the new landlord tax changes better than me.

We are facing a double whammy under the new rules. 1) More tax to pay 2) We will now have an exaggerated income (due to the new way they calculate "profit") meaning less / no tax credits eventually.

Whilst I gueninely don't mind paying a bit more tax, I feel it is unfair to lose tax credits when our actual income remains the same. I estimate by 2020 we will be approx £2,500 a year worse off, a huge amount to us.

I realise that there are some allowable costs that we can deduct from the rent (reducing our "profit" and therefore income) which leads me to the point of my post;

We have a flat with a 50yr lease. The cost of extending this is over £10k. Will this be an allowable deductible cost? If so, and we need a loan to do this, would capital repayments on the loan be an allowable cost on a yearly basis over 5 years or so? Our reason for considering this is that whilst it would reduce our rental "income" and have less impact on tax credits, it would also increase the value of the property to a point we may be able to sell eventually with no shortfall.

I thank anyone for any help or answers. I apologise that i won't be able to thank anyone until after work and kids in bed.

anselld

The lease extension premium and associated costs (legal etc) would be capital expense so not deductible from income.

The cost of obtaining and servicing finance (ie interest and any loan fees) for above would be revenue expense, but it would still fall under the new rules as far as transition to basic rate tax is concerned.

None the less a lease extension would seem to be be a good idea and many, including George, would argue that you are still benefiting from tax relief on the finance all be it only at basic rate.

OhSoStupid

Thank you for that. This is disappointing! Unfortunately, the tax relief on a loan won't compensate for the expense of making loan repayments of £200 per month with an income reduced by another £200.

It just seems ludicrous to tax people on what is essential turnover and in my situation seems unfair to penalise on tax credits award as well. However I'm sure there are others who will see it differently.

I would be interested to hear if anyone else is in the same situation. I feel i might as well just charge less rent to ensure costs are covered as I'm probably not going to benefit from any profit (although I'll have to do the sums first!). At least my tenants will be happy and not cause me any grief hopefully.

I imagine more landlords will be collecting rents in cash in the future.

ognum

OhSoStupid wrote: »

Hi everyone, I am hoping there is someone out there who understands the new landlord tax changes better than me.

We are facing a double whammy under the new rules. 1) More tax to pay 2) We will now have an exaggerated income (due to the new way they calculate "profit") meaning less / no tax credits eventually.

Whilst I gueninely don't mind paying a bit more tax, I feel it is unfair to lose tax credits when our actual income remains the same. I estimate by 2020 we will be approx £2,500 a year worse off, a huge amount to us.

I realise that there are some allowable costs that we can deduct from the rent (reducing our "profit" and therefore income) which leads me to the point of my post;

We have a flat with a 50yr lease. The cost of extending this is over £10k. Will this be an allowable deductible cost? If so, and we need a loan to do this, would capital repayments on the loan be an allowable cost on a yearly basis over 5 years or so? Our reason for considering this is that whilst it would reduce our rental "income" and have less impact on tax credits, it would also increase the value of the property to a point we may be able to sell eventually with no shortfall.

I thank anyone for any help or answers. I apologise that i won't be able to thank anyone until after work and kids in bed.

I guess I really do need to know how you have an 'exaggerated profit' not sure I understand this.

Do you own or rent the house you live in? Either you could sell and move into rental flat or give up renting and move in?

Not sure why someone who has rental incom and an asset like a flat should get tax credits so perhaps if you could explain I might understand.

Thanks

theartfullodger

OhSoStupid wrote: »

Hi everyone, I am hoping there is someone out there who understands the new landlord tax changes better than me.

We are facing a double whammy under the new rules. 1) More tax to pay 2) We will now have an exaggerated income (due to the new way they calculate "profit") meaning less / no tax credits eventually. ......

What tax credits are you currently getting (child and/or working??) and how much per month?? What impact do you think the planned changes will have on the payments for tax credits you are currently getting from the taxpayers??

OhSoStupid

Hi Ognun

Thanks for your reply.

The current rules for tax credits is that income from all sources is taken into account.

Income from employment plus income (net yearly profit) from rental property.

I work full time but earn a modest wage. The BTLs (two) are both low value and achieve low rent. Therfore we still qualify for tax credits (3 children).

When the new rules are fully implemented, instead of using the net profit figure, I will have to use almost the full rental income as the figure.

e.g. Rent £3,500 per year, mortgage £1,500 per year (interest only, which will no doubt increase next year) Normal costs £500 i.e insurance, ground rent etc. Under current rules this leaves about £1,500 profit which we pay tax of £300 on. This £1,500 is added to my income from employment and used to calculate tax credits entitlement.

Under new rules only the normal costs are deducted from the rental income. Therefore £3,000 will be the figure used as my rental income and added to my employment income. So for tax credits calculations my income has been exaggerated because i don't actually earn £3,000. I earn £1,500. Roughly apply these figures for both rental properties. This makes our rental income £6,000 (used for tax credits calculation) when we only benefit by about £2,400 (after tax)

We ideally wouldn't have either of these flats but as they are both in significant negative equity, we can afford to sell and fund the shortfall.

I live in a mortgaged property, and the value is now probably matching the outstanding mortgage (it was in negative value as well).

The flats are only one bed properties so not really suitable for us to live in. Our home is only 2 bed but we make the most of it.

Hope this explains our situation better?

OhSoStupid

theartfullodger wrote: »

What tax credits are you currently getting (child and/or working??) and how much per month?? What impact do you think the planned changes will have on the payments for tax credits you are currently getting from the taxpayers??

Thank you for your question. We receive around £50 per week tax credits (not sure whether wtc or ctc). I work full time so guessing a mixture of both.

When the new rules are introduced and my income (for tax credits calculations) increases by approx £3,000, we will lose at least £1,200 per year. Apologies my original estimate of £2,500 is probably incorrect. It will be somewhere between the two though.

I aspire to be in a position where I earn enough not to be entitled to tax credits and then i dont have to worry about these things.

leveller2911

OhSoStupid wrote: »

We are facing a double whammy under the new rules. 1) More tax to pay 2) We will now have an exaggerated income (due to the new way they calculate "profit") meaning less / no tax credits eventually.

Whilst I gueninely don't mind paying a bit more tax,

You get tax credits which means your income is judged by the government as being low so you "need" the top up of benefits . So you would be paying little tax to begin with, you then say you "genuinely don't mind paying a bit more tax" but also feel the system is somehow "unfair".......

I "feel the system is unfair" that someone can own BTL 2 houses, live in a 3rd (mortgaged) and pay very little in tax and receive benefits as well........

Aint life a b*tch

tomtontom

Whilst I gueninely don't mind paying a bit more tax, I feel it is unfair to lose tax credits when our actual income remains the same.

Do you feel it fair that the state support you when you own three properties?

marksoton

OhSoStupid wrote: »

e.g. Rent £3,500 per year, mortgage £1,500 per year (interest only, which will no doubt increase next year)

Based on those figures that's £67 PW rent and £28 PW Mortgage.

And that's before your obligations as a landlord to maintain or interest rates moving. And as you're interest only you need a payment vehicle.

You've stepped on a bus you need to get off i'd say. And pretty damn quick.

OhSoStupid

leveller2911 wrote: »

You get tax credits which means your income is judged by the government as being low so you "need" the top up of benefits . So you would be paying little tax to begin with, you then say you "genuinely don't mind paying a bit more tax" but also feel the system is somehow "unfair".......

I "feel the system is unfair" that someone can own BTL 2 houses, live in a 3rd (mortgaged) and pay very little in tax and receive benefits as well........

Aint life a b*tch

Thank you for your reply! I respect your right to an opinion but feel it is a little harsh, but i am obviously biased!

It is true that i pay less tax than higher earners, that is the nature of PAYE. I don't mind paying more tax on my income. I just feel losing tax credits when my actual income has not increased is quite harsh.

Just because we have two BTL (both negative equity) doesn't mean we are rich! We cant afford to sell them whilst they have a shortfall. If there ever comes a breakeven point, they will be gone asap. They only make our lives more complicated. We don't want to be landlords.