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I have been researching about the new government rules to remove interest on mortgages as been been allowed as an expense even though it is an expense.
Theres seems to be a lot of people saying dont worry it wont affect you if your not a higher rate tax payer. Thats true....however It can pull someone who wasnt a higher rate tax payer into that bracket.
Currently im ok. Currently my taxable profit from property is £26,320 so lets say the tax payable on this is £5264. (I don't have a 'job' my income is soley from property)
However come 2020 my taxable profit will be £35,000 (as mortgage interest cant be removed as loss) and the tax payable the same as before £5264.
So not to worry right? I pay the same tax as before.... But wait, there is cause to worry. Altough I pay the same tax as before now, the goverment sees me as earning an extra £8680 in 2020 (£35,000 - £26,320 = £8680). This pushes me £8680 CLOSER to the higher rate tax payer of 42k (or soon to be 50k).
I plan to buy more properties in the future but I cant decide between 2 options:
Option 1) Continue buying in the normal method using buy to let mortgages until I hit the higher tax rate bracket. This allows me to make use of the lower interest rates on standard BTL mortgages and less hassle. (After I hit this higher rate tax bracket Its without question I would buy with a company).
Option 2) Start buying in a LTD company NOW even though Im not a higher rate tax payer yet.
I would be using most of the income from the properties to reinvest in other property anyway so wouldnt need to take any money out of the company for personal use (to avoid getting taxed again) as we have my wifes income which is more than enough for our personal use.
Also I don't have a job my sole income is from property.
So what do you think, continue buying normally until I hit the higher rate tax bracket or start buying in LTD company now?
See example image 1 which shows my current tax situtation now
See example below this is image 2 - This shows my situation if I bought another property cash with no mortgage creating a rental income of another 12,000 per year which is what I plan to do. This would push to a taxable income of 36,000 now but will be 49,000 taxable income in 2020 just below the new higher rate tax payer. (new rate is 50k). Although I still wouldnt be a higher rate tax payer (only just) what worries me about this situation is that it basically means Im unlikely to get a job in the future ever again. As if I then got a normal salaried job e.g. 25k per year income ontop of the property income id be taxed a whopping 40% on my jobs income, so I simply wouldnt bother (or just do cash in hand jobs like 90% of plumbers etc lol)
That's unfortunately the situation we are all stuck in.So choice among these two options is very personal.You have to compare the interest rate offered to you via personal and limited company ,also the accountant and other incopration costs .I would personally keep buying till I reach the threshold of 50 K and then start transferring the equity to my better half till she reaches 50K too and then start incorporating.
The issue you have raised is far more complex than you have suggested. Firstly yes it does affect basic rate tax payers by increasing their income level. This is particularly painful for those claiming tax credits who are trying to build a property portfolio in order to gain independence from the vagaries of our Political Leaders. The reason for this issue is that increasing their taxable income results in them losing their benefits.
You have stated that you want to continue to buy properties but then go on to say that you do not need the income. In which case your starting point should be why are you buying the properties and what is your long term aim. If you eventually want to sell the properties and live off the capital increase then a company is probably not your answer. However if your objective is to pass the properties to your children then maybe the answer is a limited company with a trust or possibly an LLP (Limited Liability Partnership).
Before moving forward you need professional guidance on which will be your best route.
This is the dilemma we have all faced
The problem I see is Future Govt will tax Ltd Co more
or we could see a S24b coming into play
Ltd Co gets around S24 for now but it can saddle you with a lot more tax issues
ie how do you with draw your profits when you are a higher rate tax payer ????
without paying over 50% tax one way or another
Learn Change and Adapt ?????
If you don't have a problem today, then there's no need to do anything other than continue as you are.
Limited companies are most definitely not the answer.
Below illustrates the actual impact of S24.
Here are three example scenarios.
Basic Rate Tax Payer becomes Higher Tax Payer
Higher Rate Tax Payer loses their personal allowance
Higher Rate Tax Payer becomes Advanced Rate
The impact of S24 if NOTHING is done:
Pre S24 – 2016-17
This Year – 2018-19
Post S24 – 2020-21
Less Tax For Landlords
That's quite a statement and not really true
There are lots of reasons why investors would use a company to purchase property
If an investor doesn't want income when they are working and are using the company for later life when there work years are over its very helpful
I know I am at an age where The company profile will be very helpful
its Horses for courses each investor needs to look at every option and pick may be both or just one
there is no One Size fits all with S24 or BTL for that matter
The idea that if you remain below the HRT threshold you won't be subject to S24 is simply wrong .
You will be end of
Yes you have a personal allowance but if after that your rental income and mortgage interest keeps you below HRT territory you are still subject to S24.
So you will have less net income because of S24.
If it was that easy many LL would reduce their total income including mortgage interest to avoid S24 but that is not how S24 works.
The problem with S24 is that if sufficient income is being earned that with the addition of mortgage interest income you can be pushed into being a HRT and could mean loss of CTC etc.
To the point that many LL consider they might as well stop work so as not to be pushed into being a HRT.
Or if they don't want to do that then they need to reduce their mortgage interest.
The CTC situation is outrageous as if all added up income is £49000 each for a couple per person no loss of CTC and pension reliefs but if an income of £50000 for one person then loss of all CTC and pension reliefs etc.
S24 applies to BRT period
I cannot believe that Judicial Review failed.Forcing landlords into bankrupty surely is a breach of their human rights.
Yep as one who funded it and also contributed to the PR side of the campaign I was shocked that this situation could occur.
It was and is outright discrimination.
Now it would be different if Govt changed tax policy to state that everyone was going to be taxed on turnover.
That would never occur as the UK economy is sustained by debt.
There would be a depression and millions would be bankrupted.
I've never been part of a persecuted minority but it does give you a clue about the Jews feel.
Apparently I'm a 13th Jewish as well! !!
LL are being persecuted by those we have ordinarily considered our allies.
Can you imagine what a Labour Govt would do especially one led by the looney Corbyn!?
It simply doesn't bear thinking about.
I don't believe that LL have woken up yet to the threat that is a Labour Govt.
It would loathe such LL and would do anything it can to tax them til the pips squeak!
I would love to be out of the PR before the next GE but circumstances force me to stay in some capacity.
I am a bit like a rabbit staring into headlights.
I wish I could do something about a Labour Govt but apart from selling off leaving perhaps one remaining property I can't do that much.
Once again Paul you demonstrate your lack of understanding of how S24 works.
Roughly I get £50k rental income, pay £10k expenses and £15k interest.I am currently a basic rate tax payer, and would still be one if S24 were fully in effect. If I stayed the same S24 would NOT affect my net income. I would be assessed for £3k more tax then get tax relief of £3k for no net effect.
No that is not the case
With S24 and remaining a BRT I would end up with less net income.
If I wasn't then I wouldn't be concerned with S24 at all
Unfortunately just because I am not pushed into being a HRT territory I will still have less net income due to S24.
It is very easy to do.
Just work out what my net income would be if below the HRT threshold even after including mortgage interest to take total combined income to just below the HRT level.
You would of course have a personal allowance.
According to the calculator I end up paying double the current tax.
It is simply a fact that by whatever means any BRT will have less net income due to S24.
This is what everyone is getting wrong.
Of course the situation is made even worse if a LL is pushed into being a HRT as well.
That just piles on the S24 agony.
But it looks like I may need to reduce my alleged mortgage interest income by selling some of my properties.
There is a distinct possibility that by selling 2 properties and redeeming 3 mortgages I would get rid of about £15000 of mortgage interest.
This will ensure I keep below HRT territory though I will still be clobbered for more tax even though I will remain a BRT.
It would actually have been quite a clever change to S24 if it was stated that providing a LL remained a BRT even taking into account the addition of mortgage interest income that S24 would not apply providing that the total did not reach the HRT level
But we did not have such enlightened thinking.
S24 affects BRT; HRT and you even have the situation at £100000 I think when the personal allowance is removed
Costing the poor old LL even more in lost income.
S24 is a travesty ad it punishes those LL who have worked hard at building up a business.
Personally I'm glad I didn't build up such a BTL business that S24 would even cause me to lose my personal allowance.
These poor LL will literally have no income to pay S24 tax.
Just awful for those LL.