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I think the way the tax calculator spreadsheets have been worded misleads some landlords, including professional landlords, into thinking interest rate rises also increases their tax.
Whilst it does increase the percentage of tax to profits paid that is only due to profits decreasing. Exactly the same would happen if you decreased your rent or spent more on maintenance.
If you ignore the percentages figures and look at the actual tax due it will be clear that as costs increase, therefore profits decrease, your tax paid actually reduces.
A very interesting series of posts. Can anyone tell my where I can access a tax calculator spread sheet (mentioned by Paul)?
I want to understand. I am currently one of those landlords described by Jonathan (not quite up to 4 properties yet though!) and I would very much like to reach the 'Dyslexic Landlord stage' in my business over time. I am very aware that the tax difficulties due to S24 have the potential to become a big problem and I am keen to learn in order to inform my business/tax planning - a spread sheet which will show me different scenarios would be great to help me appreciate the impending challenges.
Any guidance would be very welcome.
p.s. I've already learned masses from your posts over the last year - thank you.
Simple way to consider future tax liability for your BTLs - is just add the rental profit to other gross income - but minus the loan interest offset.
That of course means you are declaring a higher rental profit - and thus higher tax.
From April 6 2019 Personal Allowance is £12500 and 40% tax threshold goes to £50,000 - so you can easily calculate the tax due.
The above is the HMRC Stage 1 of Tax Calc in the S.24 saga.
Stage 2 from say 2020/21 when S.24 is fully rolled out - you then get a Tax Offset of 20% of actual loan interest.
Hence a current 40% tax payer will get only 20% tax offset for loan interest - so will in effect be paying 20% of loan interest personally.
For those who under Stage of the Tax Calc remain as fully 20% tax payers there will be no change in tax.
Any change in loan interest will affect obviously true net profit - but also the amount of Tax Credit granted by HMRC to offset the Stage 1 Tax Calc.
100 % right
next year the new 50 k allowance will be helpful to landlords
if they can use their pensions let’s say that put 20k a year into a pension
it takes the 50k allowance up to 70k which is helpful and very tax efficient
ofcourse this strategy could only be used by landlords in employment
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
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Thank you John. It's brilliant!
Let me clarify. There is no such thing as s24 tax. It is not a new tax. It is a change in how interest is calculated for tax purposes. Once fully implement, s24 means that interest is not a reduction in taxable profits. Instead it is a deduction at 20% from the tax due. So you are still getting relief from the tax for the interest but at 20% irrespective of your marginal tax rate.
"s24 tax" as it is referred therefore cannot increase tax but it will definitely affect the effective rate of tax - the more interest the higher the impact and so the higher the effective rate of tax.
In effect additional interest will for the highest tax payers means that there is an additional tax "rate" applied on property profits of 25% (45% rate less 20% relief) of the interest. But this is a tax rate not more tax. The burden is primarily because of the extra interest.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)
All I know is I pay more tax and understand the impact on my bussiness I call it the evil tax and it’s very unfair and will cause homelessness
It's definitely unnatural that's for sure!
I don't shake my head at my competitors lack of knowledge, I rub my hands together at the thought of the cheap houses I'll be able to buy when they screw up.