Not really a question, more of a rant

Interaction of finance charges and brought forward losses on rental property

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I have never been a fan of Buy to Let, but the interaction between finance charges and brought forward losses on rental property brings out anger and sympathy from me in equal measure.

This is based on one of my clients, husband and wife (both retired) jointly owning a dozen rental properties.

Before we took over and before the current rules on deductibility of finance charges, the properties all made substantial losses. The accumulated losses for each of them was c. £125k at 5 April 2017.

Due to the way the finance charges have been allocated since 2017/18, ie not treated as an expense, they have made a "profit" each year, even though in reality they made further losses.

The bit that reallly p*sses me off is that the earlier losses are used to knock out the not real profits, thus creating unrelieved finance charges carried forward.

Here I am doing 2020/21 tax returns. The remaining tiny bit of old loss has been used this year and they each now have c.£92k of unrelieved finance charges carried forward and big tax bills despite their rental portfolios in reality losing £828 each this year.

If this is what was meant when it was brought in, then whoever came up with it needs to join Matt Hancock in the dole queue. 

Absolutely ridiculous.

 

 

Replies (5)

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By Paul Crowley
30th Jun 2021 17:13

It was always intended to raise tax
For basic rate payers it is far better now as unneeded finance costs run forward to when there is a profit.
Buy to let does not work the same as a real trading business. The capital gains are part of the reason for being involved and the CGT is cheaper than income tax, even with the bit extra for residential. And the CGT gives an extra personal allowance to each person involved.
Numerous entrants to Buy to let keeps prices high and young people unable to buy.

Who on Earth would enter a business that made losses every year? Only someone hoping for a profit by some other name.
Would your clients have bought all those properties without the expectation of capital gain?

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By Bobbo
30th Jun 2021 17:32

My years as a tenant of a rented property, seeing the amount I and housemates paid in rent and the almost negligible maintenance expenditure on the properties, make me find it hard to believe letting of residential property is anything other than a licence to print money. Therefore all I think when I see:

petestar1969 wrote:

Before we took over and before the current rules on deductibility of finance charges, the properties all made substantial losses. The accumulated losses for each of them was c. £125k at 5 April 2017. 

Is that either there was some dodgy accounting going on before you took over, or your clients are the most benevolent landlords ever to have existed.

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Replying to Bobbo:
paddle steamer
By DJKL
30th Jun 2021 17:52

Or their gearing is through the roof.

When we did residential we were making a gross yield of circa 4-5% on value, insurance, repairs, management could certainly bring that down to 2.5-3.5%, then depending on gearing and tax there might be very little left and our gearing was only circa 50%.

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Stepurhan
By stepurhan
01st Jul 2021 08:37

Your clients have an extensive (or expensive) property portfolio. They could afford to swallow the collective "losses" of £250,000 without any hardship.

Are your clients rich idiots? If not then there is either something wrong with the loss calculation, or they are, as has already been suggested, holding the properties to make capital gains.

Whatever the reason, I have little sympathy for them. Most people prefer the security of owning (subject to mortgage) a house rather than renting. People like your clients sitting on properties prevent that happening. Whilst undoubtedly intended to raise more tax, I don't see the change on finance charges as a bad thing. Landlords not able to quietly accrue gains whilst paying no tax in the interim might now think twice.

Silly question. We have known about this change to finance charges for some time. Indeed, it has been slowly phased in over time. As their adviser, did you not see this coming and warn them of what would happen? If not, why not? If so, why did your clients not divest themselves of some of their portfolio to address the issue?

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By petestar1969
01st Jul 2021 11:44

Thanks for the responses.

They are highly geared, re-mortgaging to fund their main business which was very profitable and has now ceased due to their retirement.

They are mostly in it for capital growth and sold a couple of properties 3 years ago. I will advise them to sell more and reduce the borrowings on others to increase the profits and soak up some of the excess finance charges.

I did say I'm not a Buy to Let fan and this change may discourage people from getting involved....

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