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Buy-To-Let Calculator: How Will New Taxes Reduce Your Profits?

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Telegraph Money has developed a sophisticated calculator to help you assess the impact of new taxes on your property investments.

George Osborne unveiled a shock tax change in the summer Budget on July 8. In effect, the Chancellor wants to tax landlords on their turnover rather than their profit, meaning that tax will be payable on nonexistent income. Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020. So mortgage costs above 75pc of rental income will mean the buy‑to‑let investments become loss-making.

That's really shocking, at least for some.

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Aren't there something like 1 million landlords who are not declaring tax? Even the ones that do will find a way to underdeclare. I have no faith in HMRC. Much easier to go after honest working taxpayers.

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The other telegraph article http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11965438/Buy-to-let-tax-will-cut-our-income-by-25pc.-How-much-will-YOU-lose.htmlhas this from an unnamed source

"The new tax has been welcomed by tenant groups and charities, including Shelter, although they have been silent on the likely effect on rents.

Lenders believe rents will rise – if only because the supply of rented property is unlikely to increase as a result of this tax, or even fall.


A senior director at a building society and major buy-to-let lender told Telegraph Money: “It is a matter of market forces. Where a new tax or cost lands on the providers of a service which is already in desperately short supply, there is only ever one result: the cost is passed on to the customers, in this case the tenant.”

Not only would rents rise, he added, “but there is a risk that landlords will invest less in their properties, leading to a fall in the quality of accommodation”."

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Can we play with some figures to illustrate whether putting the rents up does them any good?


I've no idea how much interest you pay on a mortgage.

Say round here you can get £7200 on a £120000 house.

The Landlord selling up here was on IO mortgages only cos he was leveraging up and up.


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The calculator doesn't seem to be working. The bottom half is chopped off so I cannot enter Earnings or other Non-Savings Income or submit in Chrome. Anyone else having this problem?ter

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The other telegraph article http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11965438/Buy-to-let-tax-will-cut-our-income-by-25pc.-How-much-will-YOU-lose.htmlhas this from an unnamed source

"The new tax has been welcomed by tenant groups and charities, including Shelter, although they have been silent on the likely effect on rents.

Lenders believe rents will rise if only because the supply of rented property is unlikely to increase as a result of this tax, or even fall.

A senior director at a building society and major buy-to-let lender told Telegraph Money: It is a matter of market forces. Where a new tax or cost lands on the providers of a service which is already in desperately short supply, there is only ever one result: the cost is passed on to the customers, in this case the tenant.

Not only would rents rise, he added, but there is a risk that landlords will invest less in their properties, leading to a fall in the quality of accommodation."

Ironically, it is precisely when goods are in short supply that taxes are not passed on to customers.

Businessmen understand economics the way that plants understand botany.

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The calculator doesn't seem to be working. The bottom half is chopped off so I cannot enter Earnings or other Non-Savings Income or submit in Chrome. Anyone else having this problem?ter

Am using chrome and get an option to showed advanced options

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Ironically, it is precisely when goods are in short supply that taxes are not passed on to customers.

Businessmen understand economics the way that plants understand botany.

Sorry could you explain the rationale behind the principle that taxes are not passed on to customers when goods are in short supply?

I love the phrase about business men and plants! This bit I get.

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Sorry could you explain the rationale behind the principle that taxes are not passed on to customers when goods are in short supply?

Ill have a go ... when a market is supply constrained, prices are set by ability to pay hence they have already been "bid up" to the maximum the market will bear, therefore additional supply costs (e.g. tax) must come out of the sellers margin.

Edited by goldbug9999

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Ill have a go ... when a market is supply constrained, prices are set by ability to pay hence they have already been "bid up" to the maximum the market will bear, therefore additional supply costs (e.g. tax) must come out of the sellers margin.

Exactly.

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Sorry could you explain the rationale behind the principle that taxes are not passed on to customers when goods are in short supply?

I love the phrase about business men and plants! This bit I get.

I could dig out my old economics textbook which covered this. Increased costs are rarely passed on 100%, but tend to be split between vendor and buyer. I forget the theory of why!

In this case, landlords are leveraged to very different degrees. About half the property to rent has no mortgage at all. Some BTL had a low LTV and quite a lot has LTVS in excess of 60%.

The different groups of landlords are going to be affected by this in different ways, so many well have no incentive to raise rents. Other landlords may be lower rate tax payers.

Those highly leveraged landlords who would like to raise rents may be unable to do so. Prices are set by the market, not their particular cost base.

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Can we play with some figures to illustrate whether putting the rents up does them any good?

I've no idea how much interest you pay on a mortgage.

Say round here you can get £7200 on a £120000 house.

The Landlord selling up here was on IO mortgages only cos he was leveraging up and up.

Freetrader:

Assuming a property portfolio is breaking even or showing a profit (i.e. gross rent less mortgage interest less other expenses >= 0) and also assuming the landlord's rental profits are all taxed at the same higher rate both before and after the tax change, the percentage amount the rent needs to be raised in order to be no worse off under the proposed new regime is:

(M * (((1 - BR) / (1 - HR)) - 1)) / PGR

Where:

M = mortgage interest

BR = basic tax rate

HR = higher tax rate

PGR = present gross rent

For example, a landlord with £20,000 gross rents and £12,000 mortgage interest paying tax at a marginal rate of 40% with basic rate 20% would need to raise the rent by:

(12000 * (((1 - 0.2) / (1 - 0.4)) - 1)) / 20000 = 0.2, i.e. 20%

If the mortgage interest is £18,000 and the marginal tax rate 45%, then the rent needs to be raised by 40.9% in order to be no worse off.

http://www.housepricecrash.co.uk/forum/index.php?/topic/205534-tax-relief-on-buy-to-let-mortgage-interest/page-152#entry1102767090

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