Reconsider the new Dividend Tax for small businesses - Gouvernment Petition

[Waldorf]

Reconsider the new Dividend Tax for small businesses - Gouvernment Petition

How is it small if they suddenly have to start paying 40-45% income tax on received income? Rents will have to pretty much DOUBLE to pay for it. After that go up by another 50-75% to make up for interest rate increases.

You don't understand do you? Landlords already pay tax on their net rental income at 20/40/45% - what is changing is the amount of interest costs that can be offset against your costs and so affect the taxable profit.

The eventual plan is to restrict tax relief on interest costs to 20% as opposed to your marginal rate, which could be upto 40/45% depending upon your tax band.

Let's take an example of gross rental income of £30,000 (not your typical landlord), take off maintenance, insurance costs of let's say £5,000 and interest costs of £18,000 leaves taxable profits of £7,000.

Tax paid on this currently would be 20/40/45% being £1,400/£2,800/£3,150

The new proposals will restrict tax relief in the interest to 20%, so no change for basic rate taxpayers, most pensioners would fall into this category.

For other taxpayers the taxable profit will rise by the disallowed portion of interest relief. For 40% taxpayers this would be £3,600 giving tax paid of £6,400.

For 45% taxpayers, the taxable profit would increase by £4,500 giving tax paid of £7,650.

Now imagine interest rates doubling, this would hurt the business far more, but many buy to let landlords have not factored this into their business models, if they have one! Interest rates will increase, it's just a matter of when.

[AtW]

Basic rate taxpayers don't buy BTLs. People who are most affected are those who rightfully decided that the Govt will rob their future pension, so they have to make provision for themselves, most of new BTL happened in the last 10 years max.

For a lot of BTLs rents that they had were just enough to cover repayments on mortgage - you said it yourself talking about small margins, which I believe is true.

So, they will be paying 40/45% on all currently 0% rates rent income, if rent per month was £1000 (breaking even), then they'd need £400/450 _NET_ extra money, any increase in rent will still be taxable at same 40/45% rates! So, they'd need to increase rent by £1000 in this case to make up for shortfall - which is doubling the rents.

Then will come interest rate increase, so they would need to push up rents even further (as I said), and since now rents are taxable it would mean that for ever £1 in tax they'd need to increase rents much further (which would also be taxable).

Now imagine interest rates doubling, this would hurt the business far more, but many buy to let landlords have not factored this into their business models, if they have one! Interest rates will increase, it's just a matter of when.

Yes that would be bad, however that would have happened anyway - Osborne is NOT giving cast iron guarantee that rates will be frozen! So, in one move Osborne is massively increasing pressure on BTL with new taxation.

Granted, he gave 5 years staged increase, what a pity he did not do the same for dividends!

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I don't have any BTLs, in fact I am actually renting - this will be very bad for renters because desperate BTL owners will have to push up rents massively, which by the way have already gone up big time.

[AtW]

Let's take an example of gross rental income of £30,000 (not your typical landlord), take off maintenance, insurance costs of let's say £5,000 and interest costs of £18,000 leaves taxable profits of £7,000.

You said above that BTL have slim margins, but in your example the margin is massive! The reality is that most BTL people got into it because of essentially free money that allowed them to offset rents against mortgage costs with a view that it would effectively give them free house with massively appreciated value in 20-25 years.

Maintenance and insurance costs of £5k is laughable, you serious??? Most landlords don't maintain anything, certainly not at that level of expenditure, when was the last time you rented? I've been renting since 1998 and know a thing or two about it.

I am actually confident that in a couple of years Osborne will be forced to review BTL tax relief removal because it would hit housing market badly. What a pity nobody would defend the dividend tax...

[Waldorf]

Reconsider the new Dividend Tax for small businesses - Gouvernment Petition

Basic rate taxpayers don't buy BTLs.

For a lot of BTLs rents that they had were just enough to cover repayments on mortgage - you said it yourself talking about small margins, which I believe is true.

So, they will be paying 40/45% on all currently 0% rates rent income, if rent per month was £1000 (breaking even), then they'd need £400/450 _NET_ extra money, any increase in rent will still be taxable at same 40/45% rates! So, they'd need to increase rent by £1000 in this case to make up for shortfall - which is doubling the rents.

Then will come interest rate increase, so they would need to push up rents even further (as I said), and since now rents are taxable it would mean that for ever £1 in tax they'd need to increase rents much further (which would also be taxable).



Yes that would be bad, however that would have happened anyway - Osborne is NOT giving cast iron guarantee that rates will be frozen! So, in one move Osborne is massively increasing pressure on BTL with new taxation.

Granted, he gave 5 years staged increase, what a pity he did not do the same for dividends!

I can assure you that many basic rate taxpayers have buy to let's, that's part of the cause of the housing bubble.

If we take your extreme example where by the mortgage interest is the same as the rental income ( I cannot see a mortgage being granted in this basis, as it takes no account of capital repayments, voids, maintenance etc), for a 40% taxpayer, the taxable paid would now increase from zero to £200 - so the rents wouldn't have to increase as much as you think.

If rents do increase, and there are fewer buy to letters then that will be good for first time buyers, great news in my view.

[Waldorf]

Maintenance and insurance costs of £5k is laughable, you serious??? Most landlords don't maintain anything, certainly not at that level of expenditure, when was the last time you rented? I've been renting since 1998 and know a thing or two about it....

I was making a quick estimate to cover maintenance, insurance, agency costs, voids, service charges etc, a reasonable estimate for anyone with a serious business plan.

If someone has entered this market and the rents only cover the mortgage interest, remember capital repayments are not allowed for tax, then they deserve what they get and the lender deserves the bad debts when it blows up.

No, I have never rented.

[Waldorf]

I don't have any BTLs, in fact I am actually renting - this will be very bad for renters because desperate BTL owners will have to push up rents massively, which by the way have already gone up big time.

In an earlier post you claimed that your company had been paying corporation tax at 28%, therefore with profits over £1.5 million, so surely you can afford to buy something!

[AtW]

In an earlier post you claimed that your company had been paying corporation tax at 28%, therefore with profits over £1.5 million, so surely you can afford to buy something!

I said I run the company that would have paid 28% if the rate was not changed. It would have been paying 28% now if the tax band was still here. By the way one interesting thing is that when higher rate was in place the curve of paying higher rate of tax was super quick - 300k to 1.5 mln I think, but you'd end up paying pretty much top rate of tax very quickly after you get over 300k profits, totally NOT linear that was - can't blame Osborne for that though.

Yes, I can buy for cash well above average house or "something" as you put it, however at the moment I can't afford the house that I want. And extra 3% increase in stamp duty isn't helping the decision to buy something small now (just before the market might crash thanks to BTL changes).

[AtW]

I was making a quick estimate to cover maintenance, insurance, agency costs, voids, service charges etc, a reasonable estimate for anyone with a serious business plan.

If someone has entered this market and the rents only cover the mortgage interest, remember capital repayments are not allowed for tax, then they deserve what they get and the lender deserves the bad debts when it blows up.

Most new BTL people got into market because it was all in papers how peopel build BTL empires with borrowed money - self financing next purchase with previous houses, it was viewed as no loss game and Govt helped it that way in order to prop up the housing market and stop it from collapsing.

Now that BTL people did the job they can be slaughtered.

The changes are brutal - 3% extra tax would prevent people from getting into BTL now, banks will require much higher deposit for purchases, removal of tax relief and increased rates would be enough to sink that segment big time: mark my words - this policy will be reviewed by Osborne (if he still got the job) well before 2020 is reached.

I am not BTL owner, I am not putting much into pensions (reliefs to which got limited and looks like things will get even worse), but I don't support those policies just like the dividends element (which will hit me bad), Osborne had mandate to CUT COSTS, not increase taxes.

[Waldorf]

Reconsider the new Dividend Tax for small businesses - Gouvernment Petition

I said I run the company that would have paid 28% if the rate was not changed. It would have been paying 28% now if the tax band was still here. By the way one interesting thing is that when higher rate was in place the curve of paying higher rate of tax was super quick - 300k to 1.5 mln I think, but you'd end up paying pretty much top rate of tax very quickly after you get over 300k profits, totally NOT linear that was - can't blame Osborne for that though.

Yes, I can buy for cash well above average house or "something" as you put it, however at the moment I can't afford the house that I want. And extra 3% increase in stamp duty isn't helping the decision to buy something small now (just before the market might crash thanks to BTL changes).

The 28% rate was only paid when profits exceeded £1.5 million. Over £300K there was a ratio but it increased very gradually, so if profits were say £400K in 2010 you would pay 21% on the first £300K and 29.75% on the remaining £100K, giving a total tax payable of £92,750, an effective rate of 23.19%

Are you sure you were making profits of over £1.5 million!!!

Surely if you don't own any property the extra 3% does not apply?

[AtW]

The 28% rate was only paid when profits exceeded £1.5 million. Over £300K there was a ratio but it increased very gradually, so if profits were say £400K in 2010 you would pay 21% on the first £300K and 29.75% on the remaining £100K, giving a total tax payable of £92,750, an effective rate of 23.19%

Ooops, I did not factor in relief level, found this calculator - http://mrrcalculator.hmrc.gov.uk/MRR0.aspx (fixed link)

At 750k profit (mid point to £1.5 mln) after relief taken into account it's 26.13% tax, bear in mind that it's only £450k more than £300k limit and already at over 26% tax vs 28% max.

Surely if you don't own any property the extra 3% does not apply?

Yes, it won't apply, however if I buy something small, then finally be able to afford something that I like, then why should I pay 3% extra because it would be 2nd house? I'd have to sell first, rent again LOL and buy big? That's the whole point I am making - Osborne's new idea is now actually forcing me to rent for another year or two. At least I can afford to pay in cash, so I am not dependent on interest rates or tax reliefs, but a LOT of people will be affected - the whole market dynamic was driven by BTL in recent year, why buy now if market can crash next year? My landlord is getting out of the market and selling all flats in the building...