For most BTL landlords this will have the effect of increasing their taxable income, as most BTL landlords have a mortgage in place.
Property is a golden goose in the UK both for the economy and the government. In terms of the economy it acts as a global magnet to attract inward investment from all around the world. It is one of the reasons we as a property company exist in London. It far surpasses even New York in its ability to attract global investment. New York Real Estate attracted $24.4bn since 2014 and London Property $60.3bn over the same period. This puts into perspective the attractiveness of London property which is all the more impressive given the relatively small size of London in comparison to New York.
This ludicrous tax boils down to the government being on the prowl for cash the only way it knows how – through taxation. Property remains one of the few industries available for satisfying the government’s seemingly insatiable appetite for squeezing money by almost any means necessary. To fill a hole which is ultimately unfillable.
The danger is instead of the government collecting the golden eggs, in terms of stamp duty, capital gains tax, and the income tax from the professionals who make all of this happen, there exists a danger of killing the golden goose.
The property market has already been hit with two rounds of stamp duty hikes, the last one admittedly more sensible than the first, at least in the way it is applied. Meaning stamp duty is applied in slabs rather than one fixed percentage which applies to the whole amount.
Previously the system used to be if you had a property worth £250,000 you would pay 3% on this amount in stamp duty when purchasing, which comes to £7,500 and only 1% on the property if its purchase price was £249,999 which comes to only £2,500. A difference of £5,000 in stamp duty in which only £1 could be the difference in price. This created an artificial chink in the market and caused distortion. Under the current system this is no longer the case.
The proposed tax like the previous Stamp Duty is unintuitive, below are some of the issues it will bring up:
- Someone could be earning no money on the property and still be expected to pay the tax.
- No business pays tax on turnover rather than on profits.
- How will this be implemented for example where will the money come from in a situation where the person liable for the tax pay simply doesn’t have the money to pay the additional tax.
The tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020.
Very wealthy landlords who do not need mortgages are untouched.
In effect, the Chancellor wants to tax landlords on their turnover rather than their profit, meaning that tax will be payable on non-existent income. This explains why tax rates will, for some, exceed 100%: landlords will have to pay all of their profit in tax, and then pay more tax still.
Many have turned to online forums to vent their dismay. Some are writing to their MPs and directly to Mr Osborne. Many thousands have signed an online petition calling for the tax to be withdrawn.
Here is an example which illustrates the point:
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40% tax on £20,000 (i.e. £8,000), less the 20% credit (20% of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93%.
Now, say the Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000, you will have to pay £5,000 tax in this scenario, so you make no profit at all.
There are still some items you can still claim off your rent, irrespective of the tax. They are:
Letting agent fees
If you choose to employ an agent to find a tenant or manage your property, you’ll probably pay between 10% and 15% of the monthly rental income in fees.
Buildings and contents insurance premiums
Specialist landlord insurance will cover the building, your liability as a landlord and loss of rent. You can also add contents cover, home emergency, legal expenses and rent guarantee insurance. Cover for a typical low-risk buy-to-let property costs around £200 a year.
Maintenance and repairs
Any money you spend keeping the property in a good state of repair is tax deductible. While you cannot claim for renovations, extensions or improvements that add value to the property, you can offset expenses to correct wear and tear.
Property repairs can include mending broken windows and doors, repairing broken cookers, white goods, furniture or guttering, painting and decorating and replacing or fixing the roof.
The rules here are changing. If the property is furnished, you can currently choose to claim back either a general “wear and tear” allowance or the exact cost of replacing individual items.
The wear and tear allowance is 10% of the rent annually, minus any costs you pay on behalf of the tenant such as council tax. You do not have to have spent any money replacing or repairing the furniture in a given year to claim this allowance.
Ground rent and service
If you are a leaseholder, you will usually pay ground rent to the freeholder. Service charges are common in blocks of flats and can vary greatly. Basic charges cover cleaning, maintenance, heating and lighting for common areas, but other costs could include security or concierge staff. You can also claim back any on-site services such as gardening and electrical costs.
Council tax and utility bills
If you pay any council tax or utility bills that a tenant would normally pay, you can claim the whole cost. You can also claim these costs during void periods, when there is no tenant living in the property.
Other direct costs of letting the property such as phone calls, stationery and the costs of travelling between different properties for the purposes of the rental business are also claimable expenses.
Before you submit a tax return
As a landlord you must submit a self-assessment tax return each year. If an accountant prepares this for you the fees are tax deductible.
Interestingly this tax will not affect properties which are held in a company. In this scenario you are able to offset the interest element off the rental income as before.
Clearly from this point of view it makes sense to buy in the vehicle of a company for any new properties to be purchased, however this entails its own problem. Mortgages for limited companies are restricted, more cumbersome and more expensive; and there is the added hassle and expense of running a company.
We are working with some professionals to see what will be the best way to work around this new rule, before it hits, so the issue is dealt with from a proactive way rather than a reactive one.
The Real Deal
Knightsbridge, London, SW1X
Purchase Price: £1.9m
- A large and beautiful two bedroom flat
- Long lease
- Properties in this location are being sold for £2,200 per sq. ft. and above while this property is coming at £1,820 per sq. ft.
- We believe the value of this property to be around £2.3m
- This property is located within easy reach of Sloane Street, Harrods and Sloane Square
Call us now to secure this deal!
!Tips of the Week
Don’t be emotional with property investments, invest in the RIGHT LOCATION. Your money will work for you, without you doing much, if you invest in the RIGHT LOCATION.
Decision making and speed are two characteristics which separate the investors who make money and those who do not. More people lose money by not making a decision than making the wrong decisions when investing in property.