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Tax Relief On Buy To Let Mortgage Interest.


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Torygraph whining article from our mate Anna: http://www.telegraph.co.uk/finance/budget/11724804/Buy-to-let-How-todays-Budget-will-affect-landlords.html

Thought this comment in particular was amusing, it is very sad and the buy to leacher sounds rather anxious :D , hope you enjoy:

So, Ian from Clapham has (he thinks) a "typical" £2m mortgage liability (I assumed 4% IR) generating just 10K net profit? [slow ironic hand clap]

£80K handed over to the bank each year, for what? Speculative bet on London HPI.

Edited by crashtimus prime
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Simple case study attempt:

£300k mortgage, 4%, IO = £1000 pm mortgage

£1500 pm rent (6% yield)

Current tax situation for 40% bracket:

1500 - 150 (wear and tear) - 1000 = £350 taxable income (let's ignore fees etc to keep it simple)

£350 x 40% = £140 tax liability

£360 left after mortgage

new system:

£1500 - (1000 x 0.5 effectively) = liable income £1000

£1000 x 40% = £400 tax liability

£100 left after mortgage

Have I got that right? That's a huge difference if so. In this example - which probably isn't atypical for London, at least - that's less than a third of the monthly "profit".

Looks right for higher rate payers (rental yield would be off total price including deposit, not just mortgage).

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yeah - the 10% is a "box tick" on the tax form which of course everyone ticks. It may even be that you can claim more, but then you need to show the proof. I rather doubt that many LLs pay anything like this amount, especially with the cost of rent now. And so while it may be the case that you can still claim for maintenance (rightly so), for many LLs this will be a straight loss of cash. Now they'll actually have to spend the money, and even if they do, they won't be better off (because they'll have actually spent the cash).

The 10% is only available for fully furnished lets. It was introduced because HMRC couldn't be bothered to handle the extra line on tax returns for maintenance of furnishings - they were mainly interested in big expenses related to buildings.

Landlords of furnished properties had the option to either claim a flat 10% for furnishing, or an itemised list - but not both. They were expected to choose one method only, and not switch between them. In 2012 or 2013, HMRC decided that they wanted a simpler life, so made the 10% flat claim mandatory, and no longer permited any other claims for replacement or repair of furnishings.

It appears that in the budget, this change is being reversed, and only itemised replacement of furnishings can be claimed.

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If they are playing the leveraged IO game it will hurt hell of a lot

Fiddling about with the numbers it looks like the breakeven interest will be 75% of income-after-costs for a higher rate taxpayer. ie, income 10k, interest 7.5k gives 2.5k profit now (before tax). After the change that would give no profit (for a higher rate taxpayer). I think lots of BTLs are working at less than 25% profit. The loss of the 10% allowance is a big deal - I would imagine w&t costs to be about 5% or so at best.

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Can some please tell me i have got this right

Tax relief scrapped this year for 45% taxpayers next year for 40% taxpayers year after 20% taxpayers?

I have not read the whole thread been up since four am knackered and want a shower

Tax relief unchanged for 2015/6.

Tax relief limited to 20% by 2020, with a gradual taper in the maximum relief claimable between 2017 and 2020. Precise details not yet announced.

Edited by ChumpusRex
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I can't make any sense of these figures at all? Is he saying that this BTLer is on a 20% marginal rate? In which case I don't think there would be any difference, other than the loss of the 10% wear and tear (this part is bigger than people are realising, IMO).

If this particular hypothetical is on a 40%+ marginal rate then he is in indeed FUBARED because I calculate his tax as 40% x 90 - (20% x 80) = 20 grand. And that is assuming he keeps his 10% "other expenses" - a lot of which could be wear and tear :)

I think he's just wrong. I think that at 100k income, 80k interest and 10k other costs his real and paper profits are 10k hence £2k tax bill for basic rate, £4k for higher rate (so £6k left as post-tax profit). On the new system, as a basic rate tax payer everything remains the same. As a higher rate tax payer, his paper profit becomes £50k hence a tax bill of £20k rather than 4k (so £-10k as post-tax profit). I doubt his example is that realistic, mind. OK, just fully read your post and see you also think £20k tax.

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Your letter

is only the start of it

one letter and now

you're a part of it

Now you've done it

Gid has fixed it for you

and you and you

There must be something

that you always want to do

the one thing that

you always wanted to

Now you've done it

Gid has fixed it for you

and you and you and you...

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Tax relief unchanged for 2015/6.

Tax relief limited to 20% by 2020, with a gradual taper in the maximum relief claimable between 2017 and 2020. Precise details not yet announced.

There's an HMRC briefing note here:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443277/6041_Restricting_finance_cost_relief_for_individual_landlords__3_.pdf

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I think he's just wrong. I think that at 100k income, 80k interest and 10k other costs his real and paper profits are 10k hence £2k tax bill for basic rate, £4k for higher rate (so £6k left as post-tax profit). On the new system, as a basic rate tax payer everything remains the same. As a higher rate tax payer, his paper profit becomes £50k hence a tax bill of £20k rather than 4k (so £-10k as post-tax profit). I doubt his example is that realistic, mind. OK, just fully read your post and see you also think £20k tax.

Indeed - he is f**ked if this is his real situation. He has gone from 10k profit to 10k loss (assuming that 10k of other expenses was real). Not a totally unimaginable scenario - someone with perhaps 4 BTLs in London could be in this situation.

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I think this is actually quite clever - The move won't affect (much, if at all) those with middle incomes who have bought one or two BTL as part of their pension. It probably won't affect pensioners who have a small number of BTL as most of their pension. But it does massively affect those who have a large BTL portfolio leveraged up to the hilt - and there aren't that many of these. I don't think the conservatives will lose many votes here, and they'll gain a few from right-of-centre younger voters.

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I think this is actually quite clever - The move won't affect (much, if at all) those with middle incomes who have bought one or two BTL as part of their pension. It probably won't affect pensioners who have a small number of BTL as most of their pension. But it does massively affect those who have a large BTL portfolio leveraged up to the hilt - and there aren't that many of these. I don't think the conservatives will lose many votes here, and they'll gain a few from right-of-centre younger voters.

Indeed. It actually seems to work quite well.

Low leverage landlords are penalised relatively little. But high leverage portfolios would be made non-viable.

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I think this is actually quite clever - The move won't affect (much, if at all) those with middle incomes who have bought one or two BTL as part of their pension. It probably won't affect pensioners who have a small number of BTL as most of their pension. But it does massively affect those who have a large BTL portfolio leveraged up to the hilt - and there aren't that many of these. I don't think the conservatives will lose many votes here, and they'll gain a few from right-of-centre younger voters.

I was thinking about this as well. It's going to hit highly leveraged, higher rate tax payers - but by no means all BTLers will be badly affected. What this means is that there just won't be an across the board attempt at rent increases to cover the extra costs, because there just won't be enough of them to make a difference - so BTL latecomers are going to be hit hard, however much they squeal. What it will also do going forwards is make highly leveraged BTL a much less attractive investment, which should give us exactly the result we are looking for. Great stuff.

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Thanks

 in 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.

 in 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction.

 in 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction

.  from 2020-21 all financing costs incurred by a landlord will be given as a basic rate tax reductio

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Indeed - he is f**ked if this is his real situation. He has gone from 10k profit to 10k loss (assuming that 10k of other expenses was real). Not a totally unimaginable scenario - someone with perhaps 4 BTLs in London could be in this situation.

Yes. though, to be fair, is his costs are 90% of his turnover, at a time when the base rate is 0.5%, he was going to be f***cked sooner or later. Those hardest hit will be the ones (assuming higher rate tax) who have high leverage and low yields - which is ironic because they'll be the ones with the lowest 'real' profit.

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I think this is actually quite clever - The move won't affect (much, if at all) those with middle incomes who have bought one or two BTL as part of their pension. It probably won't affect pensioners who have a small number of BTL as most of their pension. But it does massively affect those who have a large BTL portfolio leveraged up to the hilt - and there aren't that many of these. I don't think the conservatives will lose many votes here, and they'll gain a few from right-of-centre younger voters.

Of course, there will be various ways to mitigate the effect, the most obvious of which will be to move the properties into a Ltd Co, which, as it means selling the property from the individual to the company, will incur CGT at the point of sale - so a nice little tax take for the government, if the property has risen in value.

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Your letter

is only the start of it

one letter and now

you're a part of it

Now you've done it

Gid has fixed it for you

and you and you

There must be something

that you always want to do

the one thing that

you always wanted to

Now you've done it

Gid has fixed it for you

and you and you and you...

Mr Lambert isn't happy.

It’s not landlords the Chancellor has screwed, It’s tenants

Responding to the Chancellor’s Budget announcement to restrict the rate of mortgage interest relief the basic rate of 20% from 2017, Richard Lambert, Chief Executive Officer, National landlords Association (NLA), said:

“The Chancellor’s unwavering commitment to homeownership blinds him to the impact of the policies he proposes on the hard-working people he claims to champion.

“This move does nothing support wider housing provision and will ultimately make Mr Osborne responsible for adding £840 per year – or £70 per month – to rents”.

http://www.landlords.org.uk/news-campaigns/news/it%E2%80%99s-not-landlords-the-chancellor-has-screwed-it%E2%80%99s-tenants

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Of course, there will be various ways to mitigate the effect, the most obvious of which will be to move the properties into a Ltd Co, which, as it means selling the property from the individual to the company, will incur CGT at the point of sale - so a nice little tax take for the government, if the property has risen in value.

As has been pointed out upthread, moving properties into a Ltd co would require reorganisation of the financing. Which might not be possible at all or might mean having to take out a more expensive commercial loan.
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Mr Lambert isn't happy.

It’s not landlords the Chancellor has screwed, It’s tenants

Responding to the Chancellor’s Budget announcement to restrict the rate of mortgage interest relief the basic rate of 20% from 2017, Richard Lambert, Chief Executive Officer, National landlords Association (NLA), said:

“The Chancellor’s unwavering commitment to homeownership blinds him to the impact of the policies he proposes on the hard-working people he claims to champion.

“This move does nothing support wider housing provision and will ultimately make Mr Osborne responsible for adding £840 per year – or £70 per month – to rents”.

http://www.landlords.org.uk/news-campaigns/news/it%E2%80%99s-not-landlords-the-chancellor-has-screwed-it%E2%80%99s-tenants

Just as likely to be responsible for the decrease in sales of Audi TTs and holidays in the Maldives.

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I think this is actually quite clever - The move won't affect (much, if at all) those with middle incomes who have bought one or two BTL as part of their pension. It probably won't affect pensioners who have a small number of BTL as most of their pension. But it does massively affect those who have a large BTL portfolio leveraged up to the hilt - and there aren't that many of these. I don't think the conservatives will lose many votes here, and they'll gain a few from right-of-centre younger voters.

The most clever part is simply that the door of property investment doubts has has been opened slightly.

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This is a big move. If you are a 40% tax payer with a BTL that is currently breaking even you are going to be significantly in the hole. Eg. say that you had a £200k mortgage at 4% your tax bill for the BTL just went from nil to £1.6k pa. If you have a portfolio of BTL's life ain't looking very good at all.

Also the mood music is interesting. Osborn has basically indicated that the government is not going to protect BTL landlords, quite the opposite in fact, he's singled them out for "special treatment".

Time to look for the exit?

As best I can understand the term "given as a basic rate tax reduction" what I get is this, for a BTL paying 45% on rental income via self-assessment. I'm struggling to believe that I have this right, but I can't see another way to interpret it.

I%2Bmean%2Breally.png

If you're making good money from other income and operating a profitable BTL, you'll be paying the tax man to carry the investment.

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