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  • Section 24 HQ

    Effective tax rate of 66% for landlords



    Landlords face an eye-watering effective tax rate of 66 per cent on rental profits when mortgage interest relief changes come into full effect, figures calculated for This is Money and MailOnline Property reveal.

    The numbers highlight why the tax clampdown on buy-to-let has left many landlords questioning whether their property investments are still worth it given the extra financial costs they now face.

    Realising that they are paying such a high effective tax rate may push yet more landlords to quit buy-to-let and push rental prices even further amid a shortage of properties, it is feared.



    Full/source article

    This coincides with this story:

    Dozens of people evicted from their apartments in Kent will be given two weeks to find new homes or could be forced to move to County Durham.

    People living in Hythe’s Pensland House and Marlborough Court face homelessness after property owner Chelsea Portfolio gave them their marching orders to develop the building.

    A number of benefit claimants living in the 56 affordable beach-side apartments say Folkestone and Hythe District Council (FHDC) offered new properties 330 miles in north England.

    The council have over 1,000 households awaiting social housing in the area.

    “There is no prospect of immediate or even mid-term social housing for those approaching,” wrote council housing manager Mark Damiral.

    He added people would be given two weeks to seek private housing or be referred for “a choice of property in Durham or the surrounding area.”

    Full/source article

    This is all panning out as predicted here:  What causes homelessness in the UK? 

    S24 chickens coming home to roost?!

    SEE ALSO  -        Rental stock declines - 1st time in 18 years

    UP NEXT -            BTL property purchases in sharp decline

    DON'T MISS -       9 reasons why Section 24 will be reversed

    NOW WATCH:

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    Will leave it to the more experienced landlords to check me on this but to my eyes, the net yield on the property they have used to calculate this is laughable and wouldn't make it past the first tab on my stacking sheet.

    Every time I read these stories I revisit the Telegraph's BTL tax calc and enter my figures for peace of mind and I always come out as paying less tax when the new rules come in rather than more but I am just starting out.

    I'm sure DL will hammer me on this but does anyone think that Buffett's old adage about being greedy when others are fearful might be relevant in the current environment and near-term? If you can make the figures work, the demand is certainly going to be there.

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    I don’t understand how you could be paying less tax with the new rules - pay the same if you are a 20% tax payer and stay a 20% tax payer.

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    Vanessa

    Good to highlight the true cost of the tax regime changes. I think that the government would've known all this all along. They may also rely on many landlords who are running around looking after their tenants and families etc doing these sums (at best) only annually after the event. So not "waking up" till 2019 or later.

    Once the LLs realise the impact, they will surely de-gear if at all possible (cheaper than moving into holiday lets etc). If not they'll move to sell.

    De-gearing is something I, DL and a number of others on here have been advocating for a long time now. It's the logical adaptation of a business model which is necessary for all businesses in the light of changing circumstances. It hopefully will make folk realise that this IS a business(a long term one) not a bit of fun when property prices happen to be on the up.

    There have been a number of studies over the years which show that income tax take actually falls once you charge over 50%. So the proof again will be in the sales of BTL properties, the start of which we are already seeing in the auction catalogues and land registry statistics.

    Question is, who, under the PRA directives, will be in a position to buy them. If there are a few cash purchasers out there, it may be them but they will want their "pound of flesh" in a price adjustment. Distress makes for an uneven bargain.

    Anyway, glad someone has shown the true cost via simple maths. Thank you.

    Dave


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    Thank you for this post on a very interesting topic.

    As a current 20% tax rate payer, who doesn’t expect a rise taking me into the 40% bracket, am I right to assume that I will continue to pay the same amount of tax?

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    If your salary + rental profit (without mortgage interest deducted) take you into the 40% bracket then you'll pay more. See the government S24 examples website:

    https://www.gov.uk/guidance/changes-to-t...se-studies

    (This is not advice, just how I understand the rules)

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    That's how I read it too- thank you

    Although in my case it's a small pension that I finally get with my BTL gross that tips me into hight rate.

    It means that 4k of my pension is gone before i'm actually taxed on it!!


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    There is very little extra tax in your example  because your mortgage interest is very low (Especially compared to Rent, and you were already in the 40% bracket).

    I've recently built a similar spread sheet, mainly to work out how much I need to pay into my works pension from PAYE salary each year, to avoid any extra costs caused by S24.

    Simple example. Someone earning a PAYE salary of £40K pa and taking £30K rent profit could pay £25K into their pension, resulting in the total taxable income of £45K (£15K salary + £30K rental profits), as this is just below the higher rate, they end up paying 20% on rental profits as before S24.

    If I didnt pay into a pension my effective taxrate on rental profit ends up in the 65%-70% too, and Id be looking to sell some properties to keep some with little or no mortgage on them.

    (This is not advice, just how I understand the rules)

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    They got you covered, there is a nasty tax surprise if your pension grows to 1M, a threshold that could shrink further.

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