Clause 24 Calculator

In the Summer Budget on 08 July 2015 the Chancellor of the Exchequer George Osborne announced the proposal to remove full mortgage interest relief on qualifying BTL interest and finance costs (which includes costs such as lender application fees) and instead to limit the relief to the basic rate of tax only. This would mean that, when calculating your annual profits for tax purposes you would NOT deduct loan interest and other finance costs to arrive at your nett trading profit. Obviously, the result of this would be to distort the true income derived from letting property and to dramatically increase landlords’ tax bills.

The Chancellor stated that this measure would affect only higher rate taxpayers, but you will see that it would, in effect, turn the majority of BTL landlords into higher rate taxpayers. In calculating your adjusted annual income, all BTL rent (after other qualifying deductions) would count as income, as would any income from employment, dividends, etc. You would then only receive relief at the basic rate (currently 20%) on your loan interest. The way this was announced by the Chancellor made it appear that the relief from 2020/21 onwards would only reduce from 40% or 45% to 20%, but it actually reduces from 100% to 20%.

The actual effect of these measures would be to reduce the nett, take home income for a significant proportion of landlords, whether they are full time professional landlords, or part time landlords, like school teachers, nurses, fire fighters, etc.

The illustrations here calculate the effect of these proposals when they are fully implemented in 2020/21, although during the preceding three years there is a ‘tapered’ introduction of the measures. The illustrations use the current personal allowance, tax rates and tax bands for 2015/16, although you can change them. The illustrations are based purely upon my own interpretation of the proposed new tax rules provided by HMRC, which can be seen in more detail here >>

The HMRC guide above, under the title “Impact on individuals, households and families” states, “It is expected that 1 in 5 individual landlords will receive less relief as a result of this measure.” However, the HMRC have neglected to understand that the top 20% of private landlords own as much as 80% of the housing stock in the private rented sector. Therefore, the impact of these changes in terms of rent increases to offset the tax hike could be widespread.

At this stage these proposals are not yet law, not until they are approved in the Summer Finance Bill 2015 and there is sure to be considerable debate with interested parties before that happens. Even then, the measures will not come into force until April 2017, so there may still be time to influence the Chancellor.

I urge you to use this calculator to demonstrate the effects of the full implementation of these proposals (which for the majority of landlords will be drastic) and to visit your MP to make him/her aware of the crippling effect on your personal finances and to insist that he/she makes the Chancellor aware of these effects publicly in the House of Commons, where it will be officially recorded and come to the attention of the public.

 

Example 1.

Victor runs a carpet fitting business, which is successful, but the workload can be up and down. He also owns 5 buy to let properties, but he wants to grow his portfolio to provide an alternative and stable means of income to supplement the lean times in his carpet business and to provide an income for his retirement.

Tax
Rate
Tax
Band
Current
Rules
2020 Budget
Proposals
£ Tax   Tax
Salary 40,000 40,000
Nett rental income before loan interest & finance costs 50,000 50,000
Interest & finance costs 38,500 38,500
Taxable income / profit 51,500 90,000
Personal allowance 0% 10,600 10,600 0 10,600 0
Basic rate tax 20% 31,785 31,785 6,357 31,785 6,357
Higher rate tax 40% 118,215 9,115 3,646 47,615 19,046
Additional rate tax 45% 10,000,000 0 0 0 0
Loss of personal allowance 40% 10,600 0 0 0 0
Tax relief on interest 20% 38,500 -7,700
Total tax 10,003 17,703
Total nett income (take home)     41,497 33,797
Effective tax rate over personal allowance 24% 43%
Percentage change to effective tax rate 177% Greater than 100% is an increase in effective tax rate.
Less than 100% is a decrease in effective tax rate.
100% means no change to effective tax rate.

 

 

Example 2

John is retired and owns a portfolio of 14 buy to let properties jointly with his wife that they grew over 25 working years as a pension, so they have no other source of income in their retirement. John’s share of the rental income is £70,000 per year and his share of the interest and finance costs is £54,000 per year.

Tax
Rate
Tax
Band
Current
Rules
2020 Budget
Proposals
      £ Tax   Tax
Salary 0 0
Nett rental income before loan interest & finance costs 70,000 70,000
Interest & finance costs 54,000 54,000
Taxable income / profit 16,000 70,000
Personal allowance 0% 10,600 10,600 0 10,600 0
Basic rate tax 20% 31,785 5,400 1,080 31,785 6,357
Higher rate tax 40% 118,215 0 0 27,615 11,046
Additional rate tax 45% 10,000,000 0 0 0 0
Loss of personal allowance 40% 10,600 0 0 0 0
Tax relief on interest 20% 54,000 -10,800
Total tax 1,080 6,603
Total nett income (take home)     14,920 9,397
Effective tax rate over personal allowance 20% 122%
Percentage change to effective tax rate 611% Greater than 100% is an increase in effective tax rate.
Less than 100% is a decrease in effective tax rate.
100% means no change to effective tax rate.

 

Example 3

Mary is a primary school teacher. She inherited the family home after her parents passed away and refinanced it to raise the money for deposits on 4 small buy to let properties. Her salary is £25,000, she receives £24,000 of rental income per year and her interest and finance costs are £15,000 per year.

Tax
Rate
Tax
Band
Current
Rules
2020 Budget
Proposals
      £ Tax   Tax
Salary 25,000 25,000
Nett rental income before loan interest & finance costs 24,000 24,000
Interest & finance costs 15,000 15,000
Taxable income / profit 34,000 49,000
Personal allowance 0% 10,600 10,600 0 10,600 0
Basic rate tax 20% 31,785 23,400 4,680 31,785 6,357
Higher rate tax 40% 118,215 0 0 6,615 2,646
Additional rate tax 45% 10,000,000 0 0 0 0
Loss of personal allowance 40% 10,600 0 0 0 0
Tax relief on interest 20% 15,000 -3,000
Total tax 4,680 6,003
Total nett income (take home)     29,320 27,997
Effective tax rate over personal allowance 20% 26%
Percentage change to effective tax rate 128% Greater than 100% is an increase in effective tax rate.
Less than 100% is a decrease in effective tax rate.
100% means no change to effective tax rate.

 

Example 4

Janet is a professional landlord and has been for the last 25 years. Her family owns and manages a large portfolio of properties that provides an income for Janet, her husband, her two grown up children and their families They house 32 families and 9 single adults and they employ a small team of maintenance staff.

Tax
Rate
Tax
Band
Current
Rules
2020 Budget
Proposals
      £ Tax   Tax
Salary 0 0
Nett rental income before loan interest & finance costs 125,000 125,000
Interest & finance costs 50,000 50,000
Taxable income / profit 75,000 125,000
Personal allowance 0% 10,600 10,600 0 10,600 0
Basic rate tax 20% 31,785 31,785 6,357 31,785 6,357
Higher rate tax 40% 118,215 32,615 13,046 82,615 33,046
Additional rate tax 45% 10,000,000 0 0 0 0
Loss of personal allowance 40% 10,600 0 0 10,600 4,240
Tax relief on interest 20% 50,000 -10,000
Total tax 19,403 33,643
Total nett income (take home)     55,597 41,357
Effective tax rate over personal allowance 30% 52%
Percentage change to effective tax rate 173% Greater than 100% is an increase in effective tax rate.
Less than 100% is a decrease in effective tax rate.
100% means no change to effective tax rate.

 

Example 5

 

You! Use this calculator and tell us in the comments what affect the 2020 proposals will have on your take home income.

 

Access the Sheet here

 



			
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