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I met a Landlord yesterday who has a number of properties.He is employed and he hands over all Management etc to agents and is very hands off (in point of fact he owns property he has never seen Bought off plan in the city centre pre 2007.He asked me if we could meet for a chat.He is leveraged by around 75% and he is on the old Tracker Rate Mortgages.He will pay double the amount of Income Tax!!He had trouble understanding S24 and how it works - he thought It was to do with IHT and Stamp DutyHe also had a great problem understanding that when the Interest Rates rise he pays more TaxI am still shocked by the lack of knowledge at times in our sectorWe are now in Phase 2 of S24 and there is still landlords in the dark on the future TaxationI do shake my head when I meet intelligent Landlords who in real terms don't have a clue what they are doingWhat will it take for Landlords to wake up?
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.
Sorry just to clarify as this is a public forum, I don't think one pays more tax when interest rates rise. Their effective rate might change and they will be definitely worse off but that is because they pay 100% of the interest but only get 20% tax relief (not 40%) under s24.
However I also shake my head and people who consider property to always be a safe and good bet. Like any business it can go wrong and people need to stay on top of the business including the tax issues.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)
My tax advisor attends NLA meeting and shows quite clearly that a landlord can go from profit to a loss with s24 and increased intrest rates if I have time I will post the video if I can find it
yes you get a 20% credit but with each increase in intrest rates it work out more tax
this is why I stress tested my intrest rates at 6%
and I pay more tax than I would at 3% intrest rates
if your a higher rate tax payer.
I can understand why the landlord had difficulty understanding why his tax increased when interest rates rise as it isn't true. When interest rates rise you actually pay less tax (as you get a tax credit against the amount paid). It is true that the percentage of profits paid in tax increases but that is due to the profits decreasing rather than the tax increasing. Please put this into your tax calculator and just double the interest figure and see what happens to the tax amount if you doubt this.
I see what you say, but presumably that only applies to higher rate tax payers? surely someone on basic rate will pay more tax when rates rise?
When S.24 is fully operational - all leveraged LLs get a 20% Tax Credit for actual loan interest as Stage 2 of Tax Calculation by HMRC.
Stage 1 of the Calc means adding gross rent figure to all other gross income (after deducting usual valid expenses excl loan interest)
That of course may mean that someone with a wage of say £40k from April 2019 - plus say £20k gross rents - gets taxed on 60k gross income (half at 40%) but gets only a rebate of 20% of actual loan interest. From April 6 2019 - 50k is new threshold for 40% tax.
That could drag a lot of SR leveraged landlords in to 40% tax bracket.
Typo - the £10k gross income over the new £50k personal allowance is taxed at 40% - with TC of 20% of the actual loan interest
For over a decade I’ve been advising landlords to watch out for IHT, Income tax and CGT on property portfolios.
S24 did get some of these landlords to look more closely at tax but fear too many are still burying their heads.
Property is a long term proposition and taxation should be a massive part of your strategy.
Anyway we are always here to discuss.
"Sorry just to clarify as this is a public forum, I don't think one pays more tax when interest rates rise"
I can't follow that statement JST - surely the amount of S24 tax payable scales up as interest rates rise - the higher the interest rate the the more will be paid on mortgage payments so the amount paid for S24 tax will rise accordingly?
You seem to be confusing NET PROFIT per se - with higher mortgage rates.
Of course higher loan costs reduce profit - but also mean higher Tax Credit - to be set against whatever the S.24 tax charge may be.
For LLs whose gross total income from all sources is STILL within the Personal Allowance - tax charge per se is neutral.
If their loan costs rise net profit reduces - but nothing to do with tax.
I shake my head as well at the lack of knowledge
Not in despair though but just an acknowledgement of the busy lives other people lead
People tell me stuff every day and I say - I didnt know that . They say blimey I thought everyone knew that
But you simply cant keep abreast of everything out there especially if its not your No 1 priority
So your business DL is 99% wrapped up in property so you know tons and are very aware
An intelligent person who is a landlord and has say 4 units @ 75% LTV may quite easily be unaware
Their lives maybe wrapped up in other business/ jobs which take 99% of their time
Property may form only 1- 10% of their daily routine
They put their 4 units with an agent and let accountants and solicitors do the rest
They don't spend their days on PT or building houses or worrying about dripping taps
They will only start shaking their heads on 31st Jan maybe when the tax bill comes
But even then they may just pay it and think of ringing their accountant in a few months to find out why
Maybe it wont affect them that much as its another 1K tax pa and they can absorb that this year
When its £2K extra next year maybe they will put in a call then
Don't be too surprised that the masses don't know yet. They will in time ....
Jonathan Clarke. http://www.buytoletmk.com