Restrictions on residential BTL tax relief, etc.

[d000hg]

We bought a flat recently for £160k. Initially we were going to buy outright but our FA pointed out our relative return on £40k was as good or better after paying mortgage as it would be on £160 mortgage free and it put less eggs in one basket, so we got a 75% loan. As we now need the other £120k to buy a house to live in this turned out well but longer term the idea of have 4 such properties we pay 25% up front for looks precarious now. Much better to have 2 at 50% or even pay off the loan and just have the one.

I suppose it depends to an extent if you want to see any profit from rent or not. I've seen some people say the whole point of BTL is property value increase long-term, and the rental aspect is just to service the loans and anything left is icing on the cake.

The article linked at the top of the thread has a short video which says more people are looking at moving their existing properties to a Ltd. Tax issues aside, how difficult is that to do? You'd presumably not be able to keep your current mortgage so the Ltd would have to apply for one... is getting mortgages through a Ltd difficult since the Ltd would have no trading history to prove ability to pay? Or do the banks get what's going on and base it on the Ltd owner's income?
With one property it doesn't seem worth it but we now have 2 (though I own one outright and we own the new one as tenants in common) and long term might want to buy more. With 3-4 properties you're going to hit HR no matter what you do otherwise...

[ChimpMaster]

Yes if you remain a basic rate tax payer after 2020 then you won’t be affected. Realistically this mean those who don’t have a job, or a low-paid job and a small number of BTLs with low rental figures. For example, where I invest, rental income on a 2 bed flat is ~£15,000 a year. So a couple of those and a job at McDonalds will make you a 40% tax payer, even if the actual profit from the BTLs is very low!

Flexing your contracting salary/dividend is certainly useful to an extent. I’m finding that we’re leaving more and more of the funds in the Ltd because the rental income is pushing me and the wife very close to the HRT band. I plan to retire from contracting in the next year or so, which means I’m OK with leaving funds in my Ltd for now. But for those who are in PAYE jobs, or have to take salary/dividends into the HRT bracket, then their rental income tax will be a real kick in the teeth – especially if their LTV is 70% or above.

Eventually I have calculated that it will be better for some people to not have a job because they will simply be penalised by having to pay a lot more tax on their rental income. Why go to work for 50 hours a week when it means that you’ll be paying sh1tloads more tax on your property investments. Better to have free time to do with as you wish, than to slave away and have your investment income slaughtered by the taxman.

Paying down the loans is a good idea. Professional investors or those looking to grow their portfolios are looking to do so in Ltd Cos from now on, so that the loan financing costs are still deductible; there are many things to consider when making this decision.

We’ve also started increasing rents to bring them in line with market rates. I don’t like increasing rents when tenant stays long-term, but unfortunately this is one way to counteract the increased tax due. Like any business, increased costs/tax increase are eventually passed down to the consumer. You can try to absorb some of it but eventually you’re going to pass some of the extra cost on. Google ‘tenant tax’ and the impact of Section 24 will become apparent.

The other costs are still tax-deductible if they were previously. Small fry compared to loan interest costs though.

[d000hg]

So the only thing they've actually changed is how mortgage interest is treated - quite a big deal for the financial implications but simple in terms of what's actually changing?

Looks likely with my wife's teacher salary a singe BTL is going to be pushing her close to the current HR threshold although the threshold is also moving.

[eek]

Not allowable

- Interest on mortgage

Allowable
- Building insurance
- Landlord insurance
- General maintenance (not improvements)
- Property management fees on leasehold properties e.g. flats
- Estate agent management fees typically taken as commission 10%+VAT from the received rent

Basically the change is minor.

Your income is now calculated as income before interest payments rather than income after interest payments. There is then get a separate allowance (35% falling to 20%) for those interest payments....

[eek]

You're right about tax being due on losses. This situation has been artificially created by the governments aggressive stance on Section 24 and they aren't backing down on it.

I would argue that the stance on Section 24 isn't actually enough as there should be no tax relief on loans....

[Jessica@WhiteFieldTax]

Have a look about 1/2 way down here

https://www.whitefieldtax.co.uk/budg...g-budget-2016/

I crunched some numbers, a year ago.

[d000hg]

Cheers. I hadn't twigged about the 20% tax relief working like that... if I have this right 20% of your previously off-settable costs is now deducted from the tax due on the whole rental income? Which if you're not a HR tax payer or pushed into HR by BTL income, would typically mean you're not hurt? When I put in the numbers for my two BTL properties that seemed to be what it was showing me anyway.

As contractors we can presumably ensure we aren't pushed into HR tax at the cost of not being able to get as much cash out of the company, with the caveat those with several leveraged BTLs might have to take virtually nothing out of their Ltd?!

So what expenses if any are still allowable? It suggested some are but I don't know which are in each category? Expenses I can think of:

- Interest on mortgage
- Building insurance
- Landlord insurance
- General maintenance (not improvements)
- Property management fees on leasehold properties e.g. flats
- Estate agent management fees typically taken as commission 10%+VAT from the received rent

All this seems to mean that if you own a BTL with a mortgage, your answer to "where should I put this extra cash" becomes "pay off the BTL mortgage as a priority"?

[ChimpMaster]

There are many links out there such as
Buy-to-let calculator: how will new tax reduce your profit? 
and many more specialist ones.

Generally you are correct on how Section 24 will work.

From 2020 onwards, the gross rental income will be taken to be your taxable profit figure. This will be added to your overall income (salary/dividends/investment income etc) and that will decide the marginal rate of tax you pay on the gross rental figure. A 20% tax credit will be then be applied to the tax due on the gross rental income.

Your loan interest costs will be irrelevant to the tax calculation.

This will impact HRT tax payers the most because they will be paying 40% (or 45%) on their gross rental income. It will impact many basic rate tax payers too because they will be pushed in the HRT bracket.

You're right about tax being due on losses. This situation has been artificially created by the governments aggressive stance on Section 24 and they aren't backing down on it.

[d000hg]

So this starts coming in from April and is being introduced in staggered stages, with 75% finance costs being allowed then 50% then 25% then 0% in coming years. But what exactly does 'allowed' mean in this context? I've seen it discussed that the system is moving to a "basic rate reduction" but that doesn't mean much to me.

Anyone got a link to a good, clear explanation, or able to provide one? Is it as simple as "you pay tax on what you bring in regardless of your costs" or is there more to it than that? Because that could lead to a situation you make a loss but still get taxed in extreme cases (rental £500pcm, mortgage interest £550pcm) or certainly where the tax leaves you making a loss (rental £600pcm, mortgage interest £550pcm, tax on £600 is more than £50).

I can see this sort of approach deters cash-poor investors buying BTLs on credit

edit: surely it's been fully discussed here but I'm not sure what to search for. If anyone recalls a thread just post a link