Key impact-
Budget 2015/6 updates mean property investors will pay more tax!
One of the statements being bandied around this budget announcement was that it will only impact ‘1 in 5’ landlords. I said it then and it has since been proven that only those with ‘no mortgages’ and possibly some with very low rental incomes (ones who own a single rental property) and little other income may escape any impact by this budget announcement.
In the 2015/16 budget announcements, George Osborne put in place a number of tax changes, which will directly impact Property Investors and Landlords.
The three main changes are –
Changes to mortgage interest relief. The tax relief on mortgage interest will be set at 20% even though you might be a higher rate taxpayer. In essence, this means that, as an example, if you previously had mortgage interest costs of £6,000 it will be reduced to £3,000 as an allowable cost to offset against your income.
Removal of the 10% wear and tear allowance. If you have furnished properties then you were previously able to claim 10% of the net rent. This has now been removed. As such if your rental income for furnished properties was £40,000 then you would lose the £4,000 allowable costs for wear and tear.
There are ways how you might be able to take advantage of this change, which will be discussed later.
Increase in SDLT when purchasing additional property. There is an additional surcharge of 3% of the purchase prices when buying any BTL (or second property), whether as an individual or an incorporated identity.
One of the less discussed impact of this Budget Announcement is how some people who are currently basic rate taxpayers may soon be become higher rate taxpayers without any increase in income. This ultimately implies that a huge number of landlords will pay more tax on their property portfolio.
Let’s now discuss the real life impact of these changes and how can these be mitigated (in some cases).
The problem — the removal of the 10% wear and tear allowance
Previously your monthly rental accounts may have looked something like this:
+£2,000 rental income
-£500 mortgage interest
-£300 utility bills
-£300 other costs
-£170 wear and tear allowance (10% of the rent less utilities)
====
Leaving £730 profit
Now that the 10% wear and tear allowance has been removed, your monthly profit has increased to £900, which leads to a yearly increase of £816 in tax for a higher rate taxpayer (£170 X 12 months X 40%). Ouch!
Ways to mitigate this increase in your tax
The budget change has removed the automatic entitlement to relief for an assumed amount of 10%, and replaced it with relief only for actual expenditure. It now allows costs to be deducted when you are replacing or repairing furnished items, but crucially, not the original cost of an item.
In the majority of cases, you will be buying properties which already have carpet and, perhaps, curtains. But what if you agreed a deal with the vendor that involved them leaving behind the furniture and white goods? I would think that some vendors may be keen to leave a lot of their furniture behind if it helps them to sell the property to you, particularly if they’re selling a rental property and have no need of the items themselves.
You can ask the seller to list all the items that will be left in the property and you must allocate a cost against each item to ensure that you maximise your tax relief. For example:
£125,000 house purchase
£2,500 carpets throughout
£1,200 curtains throughout
£2,800 sofa and settees in lounge area
£3,500 furniture (dining table and chairs, cupboards and wardrobes in bedrooms)
Total purchase price including furnishings = £135,000
If you itemise the deal this way, then subsequently wish to replace any of the items because they look tired or you think the property needs a refresher, then the cost of the replacement items becomes allowable as a deduction that can be offset against your income. If you had bought the property without the furniture and fittings, then purchasing new ones would not be tax deductible.
There is also an added bonus…
Cut your stamp duty
From April, Stamp Duty Land Tax (SDLT) will have two components for property investors. The normal residential SDLT charge and the 3% SDLT surcharge.
Imagine that you have agreed a price on the property above for £135,000. There would usually be two levels of SDLT to take into account:
£200 (2% of the difference between £135,000 and £125,000)
£4,050 (3% on the entire amount of £135,000)
£4,250 SDLT total
However, as we have seen from the previous example, the total price you pay to the vendor may be partly for the house and partly for the furnishings. If that’s the case, you can reduce the portion of the sale that is subject to SDLT. Let’s assume that you agree that the seller will leave all of the curtains, carpets and furniture items. You agree that these items should be valued at £10,000. The land and buildings cost has therefore been reduced to £125,000. SDLT will therefore be re-claculated as:
£3,750 (3% on the entire amount of £125,000)
£3,750 SDLT
Hopefully, by now you can see there is an added benefit to negotiating the purchase of the fittings — you can reduce not only future tax, but also the SDLT payable on the sale.
Practical steps you need to take to reduce your tax liability
Agree a purchase price with the seller
Itemise the furnishings and fixtures on box 10 in form SDLT1
Keep a record of items that now sit in the property
Purchase replacement furniture items and offset the cost against your property income.
Impact of the Mortgage Tax Relief limitation.
If you are not already aware, the current use of interest paid on your mortgage and property loans as an Expense before calculating your profit will no longer be allowed from April 2016, if the challenge to this law is not successful (See end of this article). The landlords are fighting to change this ill-judged piece of law as it treats the business of renting properties different from all other businesses in the land where any interest paid on business loans IS a ‘business expense’ and is always deducted before calculating business profits for tax purposes. The change of law means that the limited mortgage interest deduction will be available as a Relief from April 2016 (reducing on a sliding scale until April 2020 and then NIL), hence increasing your ‘Apparent Income’, thereby changing your tax band (moving you into a higher band) for the purposes of Income Tax Calculation. This implies that you could be paying a higher rate of tax even without any increase in your income.
See some examples below of how this change may move people from Basic Rate to Higher Rate tax band, Higher Rate to Additional Rate and also the Loss of Personal Allowance for those earning above £100K. For purposes of simplification, the personal allowance rates, Income Tax thresholds, etc. have been kept static for the transitions period between 2016 and 2021.
| A case where a basic rate taxpayer could become a higher rate taxpayer | |||||
| Assuming employment income of £35,000, no other income apart from rental profits | |||||
| Assuming a personal allowance of £11,000 | |||||
| Assuming a basic rate threshold of £32,000 | |||||
| Assuming loss of personal allowance from £100,000 | |||||
| Assuming an additional rate threshold of £150,000 | |||||
| Assuming £20,000 rental receipts, £5,000 costs, £10,000 interest paid annually | |||||
| To 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21 & on | |
| Rents Received | £20,000 | £20,000 | £20,000 | £20,000 | £20,000 |
| Allowable Costs | £5,000 | £5,000 | £5,000 | £5,000 | £5,000 |
| Profit Before Interest | £15,000 | £15,000 | £15,000 | £15,000 | £15,000 |
| Mortgage Interest Deductible | £10,000 | £7,500 | £5,000 | £2,500 | £0 |
| Taxable Profit | £5,000 | £7,500 | £10,000 | £12,500 | £15,000 |
| Employment Income + Rental profits | £40,000 | £42,500 | £45,000 | £47,500 | £50,000 |
| Less Personal Allowance | £11,000 | £11,000 | £11,000 | £11,000 | £11,000 |
| Taxable Income | £29,000 | £31,500 | £34,000 | £36,500 | £39,000 |
| Tax at 20% | £5,800 | £6,300 | £6,400 | £6,400 | £6,400 |
| Tax at 40% | £800 | £1,800 | £2,800 | ||
| Less Tax Reducer: | N/A | ||||
| 20% of £2,500 | -£500 | ||||
| 20% of £5,000 | -£1,000 | ||||
| 20% of £7,500 | -£1,500 | ||||
| 20% of £10,000 | -£2,000 | ||||
| Tax Payable | £5,800 | £5,800 | £6,200 | £6,700 | £7,200 |
| Difference vs 2016/17: | £0 | £400 | £900 | £1,400 | |
| A case where an individual may lose their personal allowance | |||||
| Assuming employment income of £95,000, no other income apart from rental profits | |||||
| Assuming a personal allowance of £11,000 | |||||
| Assuming a basic rate threshold of £32,000 | |||||
| Assuming loss of personal allowance from £100,000 | |||||
| Assuming an additional rate threshold of £150,000 | |||||
| Assuming £40,000 rental receipts, £5,000 costs, £20,000 interest paid annually | |||||
| To 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21 & on | |
| Rents Received | £40,000 | £40,000 | £40,000 | £40,000 | £40,000 |
| Allowable Costs | £5,000 | £5,000 | £5,000 | £5,000 | £5,000 |
| Profit Before Interest | £35,000 | £35,000 | £35,000 | £35,000 | £35,000 |
| Mortgage Interest Deductible | £20,000 | £15,000 | £10,000 | £5,000 | £0 |
| Taxable Profit | £15,000 | £20,000 | £25,000 | £30,000 | £35,000 |
| Employment Income + Rental profits | £110,000 | £115,000 | £120,000 | £125,000 | £130,000 |
| Less Personal Allowance | £11,000 | £3,500 | £1,000 | £0 | £0 |
| Taxable Income | £99,000 | £111,500 | £119,000 | £125,000 | £130,000 |
| Tax at 20% – 32,000 @ 20% | £6,400 | £6,400 | £6,400 | £6,400 | £6,400 |
| Tax at 40% | 26800 | 31800 | 34800 | 37200 | 39200 |
| Less Tax Reducer: | N/A | ||||
| 20% of £5,000 | -£1,000 | ||||
| 20% of £10,000 | -£2,000 | ||||
| 20% of £15,000 | -£3,000 | ||||
| 20% of £20,000 | -£4,000 | ||||
| Tax Payable | £33,200 | £37,200 | £39,200 | £40,600 | £41,600 |
| Difference vs 2016/17: | £4,000 | £6,000 | £7,400 | £8,400 | |
| A case where a higher rate taxpayer could become an additional rate taxpayer | |||||
| Assuming employment income of £130,000, no other income apart from rental profits | |||||
| Assuming a personal allowance of £11,000 | |||||
| Assuming a basic rate threshold of £32,000 | |||||
| Assuming loss of personal allowance from £100,000 | |||||
| Assuming an additional rate threshold of £150,000 | |||||
| Assuming £40,000 rental receipts, £5,000 costs, £20,000 interest paid annually | |||||
| To 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21 & on | |
| Rents Received | £40,000 | £40,000 | £40,000 | £40,000 | £40,000 |
| Allowable Costs | £5,000 | £5,000 | £5,000 | £5,000 | £5,000 |
| Profit Before Interest | £35,000 | £35,000 | £35,000 | £35,000 | £35,000 |
| Mortgage Interest Deductible | £20,000 | £15,000 | £10,000 | £5,000 | £0 |
| Taxable Profit | £15,000 | £20,000 | £25,000 | £30,000 | £35,000 |
| Employment Income + Rental profits | £145,000 | £150,000 | £155,000 | £160,000 | £165,000 |
| Less Personal Allowance | £0 | £0 | £0 | £0 | £0 |
| Taxable Income | £145,000 | £150,000 | £155,000 | £160,000 | £165,000 |
| Tax at 20% – 32,000 @ 20% | £6,400 | £6,400 | £6,400 | £6,400 | £6,400 |
| Tax at 40% | 45200 | 47200 | 47200 | 47200 | 47200 |
| Tax at 45% | 0 | 0 | 2250 | 4500 | 6750 |
| Less Tax Reducer: | N/A | ||||
| 20% of £5,000 | -£1,000 | ||||
| 20% of £10,000 | -£2,000 | ||||
| 20% of £15,000 | -£3,000 | ||||
| 20% of £20,000 | -£4,000 | ||||
| Tax Payable | £51,600 | £52,600 | £53,850 | £55,100 | £56,350 |
| Difference relative to 2016/17: | £1,000 | £2,250 | £3,500 | £4,750 | |
Summary
The above examples show how almost anyone with a rental income and a borrowing on their property will be affected, despite government claims to the contrary. The impact this will have on the economy has not even been considered. With the number of landlords deciding to quit the Buy-to-let market and selling up is on the rise, which will cause more properties onto he market which has an impact on the price of houses in any area with an oversupply. Additionally, the tenants who have been kicked out of those properties need to be housed, which may increase the burden on local councils with more people with housing demands, while the social housing stock is on a decline.
To fight the tax, join
https://www.facebook.com/clause24/?fref=ts
Please pledge
https://www.crowdjustice.co.uk/case/tenanttax/
Credits –
Some of the examples and text has been ‘borrowed’ from the very respected Simon Misiewicz of Optimise Accountants
Credit is also due to Jonathan Smales for producing the payscale examples above.