Married Low Income Investment Property Owners Hit by HMRC.

RadicalDave

If you own investment property with your spouse and he/she earns less than the tax free allowance AFTER deducting financing interest, because HMRC now deduct the tax allowance BEFORE crediting back financing cost, there may be no unused allowance left to share.

Prior to 2018, before the 4 year sliding scale that resulted this year in 100% removal of finance interest from private owned investment property running costs, spouses on low incomes could share their resulting unused tax allowance with their partner. Now the finance costs are credited back only after the allowance has been applied to 'Net Profits'.

For example: with current allowance at £12570pa

After all costs including financing of £5140 interest payments, Partners A and B earn £10,000 each pa from their shared properties. Partner B used to enjoy £1260 of Partner A's resulting unused allowance at 20%.saving £252 tax. (£12570 - 1£0000 = £2570 unused tax of which £1260 was transferable)

Now, new rules suggest that Partner A now earns £12570 (even though the net income remains at 10k), leaving no unused allowance. Only afterwards is the artificial 'Net Profit' then credited £2570 at 20%; called 'Finance cost Tax allowance', serving only to confirm no tax to pay by Partner A. Partner B has meanwhile lost the benefit of Marriage Allowance.

HMRC are taking money from low paid couples trying to be independent responsible investors providing homes for others and a pension income for themselves. This is additional to the nonsense that penalises small individual property investors by insisting they alone cannot deduct all financing costs whilst big companies and foreign investors can. Shame on the Government. Consider this when you next vote.

[Deleted User]

Yep - there was a lot of uproar at the time, and justifiably in such cases. It’s an even bigger hit for higher rate taxpayers who have high finance costs with many having a negative cash flow on the property while being liable for tax on a ‘profit’ which no longer includes a deduction for finance costs.

Jeremy535897

See https://www.accountingweb.co.uk/any-answers/has-anyone-noticed

There is a particularly nasty impact on grants based on taxable income (for example parental contributions to student grants), because the interest is not counted as a taxable expense.

[Deleted User]

Jeremy535897 said:

See https://www.accountingweb.co.uk/any-answers/has-anyone-noticed

There is a particularly nasty impact on grants based on taxable income (for example parental contributions to student grants), because the interest is not counted as a taxable expense.

True  - never thought of that. Really not a well thought out policy at all!

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

See https://www.accountingweb.co.uk/any-answers/has-anyone-noticed

There is a particularly nasty impact on grants based on taxable income (for example parental contributions to student grants), because the interest is not counted as a taxable expense.

True  - never thought of that. Really not a well thought out policy at all!

I remember Osborne saying that it was designed to level up a bit with house owner occupiers, who got no tax relief on their mortgage interest at all. The fact that they also paid no tax on any income (because there wasn't any) seemed to escape him (I doubt it did really, but it shows how difficult it was to justify it).

I could vaguely understand some sort of thin capitalisation argument, when house prices were rocketing and you could borrow 100%, because then you were really buying it for capital gain, but I do mean "vaguely", as thin cap is more about stopping the exportation of profits than converting them to taxable gains.

Jeremy535897

Perhaps I should also add that, having looked at it further, I don't agree with the opening post, because it is quite clear that the transferor spouse does not have to have an income within the personal allowance figure to transfer the marriage allowance. That is clear from the legislation and the guidance on GOV.UK. In some circumstances the new system is advantageous, for example where a landlord just has rental income, and the rental income before finance costs is within the personal allowance. Under the old rule, the finance costs merely reduced the income already within the personal allowance, and are wasted. Under the new system, they may be carried forward.

silvercar

You can carry the costs forward to future years, so that when a time comes that you do have income, you can use those interest costs against the income.

we had a discussion on it last year. 

https://forums.moneysavingexpert.com/discussion/6231254/help-with-unused-residential-property-finance-costs-from-earlier-years/p1