Change to taxation of Landlords

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Example Additional Rate – Alex’s Position from 2020 Alex, the landlord, still pays tax at the additional rates on his highly leveraged portfolio. The new rules on the rules on deductibility of finance costs are now fully in place (i.e. from 2020-21 onwards), but no changes were made by Alex to adapt: Rent: Mortgage: £ 200,000 £(150,000) As a result of these new rules, Alex’s property portfolio, which was previously profitable, now makes a loss of £10,000 p/a. Insufficient income is retained after tax to make the mortgage payments, putting the landlord in a precarious position. This simple scenario highlights how the changing tax context may affect the viability of property investments unless steps are taking to adjust to these changes. Tax Liability at 45%*: Rental Profits: £ (60,000) £ (10,000) * The tax calculation is now a little more complicated. We first look treat the entire rent as assessable on Alex (i.e. £200,000 @ 45% = £90,000) and deduct tax relief on the mortgage payments as a “tax reducer” at basic rate (£150,000 @ 20% = £30,000), leaving a tax liability of £60,000.
Example Additional Rate – Bob’s Position 2016 vs. 2020 Let’s look at a different scenario, which helps highlight how even basic rate taxpayers can be significantly affected by these new rules. Bob, a landlord and retiree, receives rental income from his property portfolio, however, due to the significant mortgage interest payments, and his lack of other sources of income, the net rental profits are low, and assessable to tax at basic rate. In 2016 the position is as follows: Rent: Mortgage: Tax Liability at 20% Rental Profits: £ 150,000 £(125,000) £ ( 5,000) £ 20,000 As we can see, at the moment Bob’s income from the rental portfolio is firmly within his personal allowance / basic rate band, allowing him to generate an acceptable level income during his retirement. However, by 2020 Bob’s entire rental income of £150,000 per annum will be assessable to income tax, pushing him well into the higher rates of tax. Although relief on mortgage interest is given as a “tax reducer” at 20%, this will not fully offset the significant amount of rental income that will be taxed at the higher rates as a result of these changes. Without any change to his investment structure Bob will may find himself living a much more frugal existence during his retirement as a result.
Page 1 and 2: Changes to the Taxation of Landlord
Page 3 and 4: Current position First the basics.
Page 5: Understanding the changes From Apri
Page 9 and 10: Example Disposals - Dan’s Positio
Page 11 and 12: Example Incorporation - Iain’s Po
Page 13 and 14: Adapting to the Changes Continued..
Page 15: Final thoughts In summary, the rece

Change to taxation of Landlords

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