Summer 2015 Budget - Interest relief restrictions for BTL Properties

Summer 2015 Budget - Interest relief...

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What does it mean by the relief will be cut to the basic rate of income tax, which currently stands at 20 per cent.The measure, which will be phased out "gradually" from 2017.

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By darrenwilliams
08th Jul 2015 16:37

Only basic rate tax relief will be given rather than higher rate tax relief(assuming you are a higher rate ta payer, so as an example only 20% instead of 40%), once fully in place.

I do find it very worrying, as really this is the first time I can think of that a business expense only ranks for basic rate tax relief(yes there are some expenses that are effectively at 0% like entertaining, but to be honest they were always the 'are they really a business expense kind of expenses').

Why not do this for other business expenses(watch this space), even though you pay higher rate tax relief on your income!!!

 

Very worrying trend.

 

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Replying to lionofludesch:
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By jamesallenbaker
08th Jul 2015 16:53

What do it mean by "phased in

What does it mean by "phased in from April 2017"? i

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Replying to memyself-eye:
By JCresswellTax
08th Jul 2015 17:02

Try this

jamesallenbaker wrote:

What does it mean by "phased in from April 2017"? i

Summer budget 2015

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By JCresswellTax
08th Jul 2015 16:40

It is because

property rentals aren't regarded as a business, but rather an investment I think.

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By Wanderer
08th Jul 2015 16:57

Slippery slope

Think I remember mortgage interest relief (on home) went something like:-

Full tax relief on first £25,000 (doubled up for unmarried couples).

Full tax relief on first £30,000 (doubled up for unmarried couples).

Full tax relief on first £30,000.

Basic rate relief on first £30,000.

No tax relief.

 

Will interest on BTL properties go the same way eventually?

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By jamesallenbaker
08th Jul 2015 16:57

How about BTL properties owned by UK companies? How about non resident landlords with UK mortgage?

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By Wanderer
08th Jul 2015 16:59

UK companies

With a 20% Corp Tax rate (going down to 18%) surely they are only getting 20% relief anyway?

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By Ian McTernan CTA
08th Jul 2015 17:08

here's the problem

Here's the problem.

Old system: rents 250k, mortgage 150k, other expenses 100k, net cashflow and profit NIL.

New system: same expenses, net profit before interest relief 150k.  total tax 50k, less 30k interest relief, net tax payable 20k.

Welcome to the world of paying tax without the income or the profit to support it.

(This is based on my first reading of the notes and may be subject to clarification from HMRC if they reply to my email to them).

The way I see it, this either pushes up rents or landlords are tempted to skimp on repairs and maintenance.

It would have been useful for a consultation on this including trade bodies.

Oh, and most seem to have not noticed the 10% Wear and Tear allowance being scrapped from April 2016 as well...

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Replying to paul.benny:
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By jamesallenbaker
08th Jul 2015 17:21

what will be the effective date of the above new restrictions? 

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Replying to paul.benny:
paddle steamer
By DJKL
08th Jul 2015 17:41

Re wear and tear

Ian McTernan CTA wrote:

Here's the problem.

Old system: rents 250k, mortgage 150k, other expenses 100k, net cashflow and profit NIL.

New system: same expenses, net profit before interest relief 150k.  total tax 50k, less 30k interest relief, net tax payable 20k.

Welcome to the world of paying tax without the income or the profit to support it.

(This is based on my first reading of the notes and may be subject to clarification from HMRC if they reply to my email to them).

The way I see it, this either pushes up rents or landlords are tempted to skimp on repairs and maintenance.

It would have been useful for a consultation on this including trade bodies.

Oh, and most seem to have not noticed the 10% Wear and Tear allowance being scrapped from April 2016 as well...

Re wear and tear there appears to be some suggestion of a "son of renewals basis" system. Have not read all this yet.

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paddle steamer
By DJKL
08th Jul 2015 17:36

Phasing

HMRC gives the phasing on their website, in effect:

This measure will restrict relief for finance costs on residential properties to the basic rate of income tax. This will be introduced gradually from 6 April 2017. Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan. Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs. Landlords will be able to obtain relief as follows:

 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 reduction

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

In effect it looks like it may be marginal tax will be computed on the total, without the interest relief, then tax relief on the interest calculated reducing the tax bill, or something similar.

Given indexation in companies re gains the corporate holding route may be the way to go, 18% tax on income (by 1/4/20) , 18% on indexed gains but of course extraction by dividends now to be more expensive.

I think it will have to be :-make all the profits via a company then pay nothing out until non resident-catch is I doubt my practice will ever earn me enough to get a flat in Monaco.

 

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RedFive
By RedFive
08th Jul 2015 17:40

death of tax return

I'm glad the death of tax returns announced in the last budget means no-one will need to worry about all these new rules anyway.

;-)

 

 

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Francois
By Francois Badenhorst
08th Jul 2015 17:52

Check out Rebecca Benneyworth's expert take on the issue: https://www.accountingweb.co.uk/article/osborne-s-reforms-send-property-...

 

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By Ian McTernan CTA
08th Jul 2015 21:19

Response from HMRC-Editor to note!

I emailed the people responsible, here's the text of the reply (apparently wear and tear allowance is unfair on landlords too..):

Hi Ian,

 

Thank you for your email.

 

You are correct - this is how the basic rate mechanism will work. For completeness, in your example, from 2020/21 their calculation (using 16/17 tax rates) will be as follows:

 

Property profits:

Rental income                  250,000

Non-finance expenses  (100,000)

                                                150,000

 

Income tax calculation:

43,000 @ 20%      8,600

107,000 @ 40%  42,800

                                51,400

Tax reduction (30,000)  [150,000 @ 20%]

Total tax              21,400

 

Only around 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure, with only 10% expected to pay more than £500 in additional tax and only 1% expected to pay more than £5,000 in additional tax. These landlords will typically have higher value property portfolios, larger rental income and larger finance costs.

 

This change ensures all individual buy-to-let landlords will receive the same relief for their finance costs, reducing the advantage wealthy landlords may have in the property market. Landlords who are basic rate or non-taxpayers will only lose out if they have finance costs which currently receive relief at higher or additional rates of tax, such as if their finance costs and rental income are very large. The government expects around 94% of landlords who will have to pay more tax will have a taxable of income over £35,000. Of the 6% with taxable income under £35,000 and who have to pay more tax, they have an average (pre-tax) rental income of £64,380 and own on average 6 properties.

 

To give landlords time to adjust the government is introducing this change gradually from April 2017 over 4 years.

 

The government does not expect this to have a large impact on either house prices or rent levels due to the small overall proportion of the housing market affected (there are 1.6m buy to let mortgages outstanding in the UK overall, out of a total private rented sector of 4.4m households and total housing stock of 22.6m households in England). As above, only around 1 in 5 (18%) individual landlords are expected to pay more tax as a result of this measure. The OBR believe the impact on the housing market will be small and, taking account of the other measures in the budget, have not adjusted their forecast for house prices.

 

The Government will also reform the unfair Wear and Tear allowance. This will allow landlords of all residential properties (excluding Furnished Holiday Lets) income tax relief on the cost of renewing furnishings provided in their properties. All landlords will now be able to offset the costs of renewing furnishings in their properties which should lead to improvements in tenancy conditions.

 

Megan Shaw
Product Owner - Property Income & REITs
HMRC, Room 3/64, 100 Parliament Street, London, SW1A 2BQ
03000 585628

So basically they agree with me, tax will now be payable by people whose cashflow position is zero and have effectively made no profit.

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By awoodj
09th Jul 2015 10:23

Is this correct?

Can anyone confirm if I have understood this correctly spreadsheet results are right based on this example? Happy to send Excel version if anyone wants it.

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Replying to Anonymous.:
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By Ian McTernan CTA
29th Sep 2015 16:55

It's bad news

[quote=awoodj]

Can anyone confirm if I have understood this correctly spreadsheet results are right based on this example? Happy to send Excel version if anyone wants it.

[/quote

The first example is wrong, personal allowance means tax payable is Zero.  Second example should take into account personal allowance ans show there is no a tax bill where none existed before.  If there is other income then example two might be in the higher rate band.

The real issue is owners with multiple properties, or highly leveraged, or professional landlords, who could easily see tax bills higher than their actual real cash flow profits.

Real losers will be the renters, who will either face reduced choice or worse quality as well as higher rents.

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Replying to justsotax:
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By awoodj
30th Sep 2015 09:43

Ok I should have specified that it assumes the person has some other income but is still in lower 20% band currently and personal allowance is already used. This is the likely case for many landlords, especially those at that end of the tax bracket.

I have also seen results of a recent National Landlords study that suggest 4 out of 5 rather than the 1 out of 5 as suggested by HMRC will be affected. This is because of the way the 20% tax credit is calculated afterwards which means many currently basic rate taxpayers will become 40% or higher tax payers after interest cost is removed and then only get the 20% credit after the fictional "profit" figure is calculated.  

 

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By Jon11
15th Jul 2015 21:32

Clarity

Yes, the terminology from Mr Osborne during the Budget was confusing.  He said 'your interest claim is limited to your basic rate of tax' or similar.  In plain English, I understand it to be: take only 20% of your interest figure for your expense.

So during the tax return process, it will ask for an interest figure and then calculate 20% of this as an expense (previously all of it).

There are 3 examples from Rebecca Benneyworth on this site:

https://www.accountingweb.co.uk/article/osborne-s-reforms-send-property-...

Bombshell.

 

 

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By King_Maker
16th Jul 2015 10:05

@Jon11 - the "Red Book" seems

@Jon11 - the "Red Book" seems clear on it subject (at least to me).

The restriction of 20% refers to Basic Rate Tax of 20%, NOT restricting the finance costs (including) to 20% of the total relevant costs - your link to RB's examples confirms this.

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By stephenp
20th Oct 2015 11:55

Losses bwfd

Hi All,

Has anyone any idea what will be happening to losses brought forward in the property business - will these still be able to be used the the same way, there is no mention of this anywhere.

Steve

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By aml400
13th Dec 2015 14:29

losses bwfd

Hi Steve,

Has anyone been able to confirm to you if losses from previous years can be used to reduce the impact of he BTL tax on renal income?

Thanks

 

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