Landlords lose legal challenge over BTL tax changes
By Kevin McDaid, Oct 17 2016 02:08PM
She was the great hope for tens of thousands of individual landlords to stave off a planned government tax increase on buy-to-let properties being phased in over 4 years from April 2017. But Cherie Blair QC, herself a landlord of multiple properties with her husband, the former PM Tony Blair, and their three children, has failed in her attempt to obtain a judicial review on the grounds that the new rules would be an unfair tax on tenants because they would drive up costs for buy-to-let investors.
Currently loan interest is treated as an allowable expense in exactly the same way that repairs or buildings insurance are. However, from April 2017, a 20% tax deduction will be allowed instead. For a 40% taxpayer, with BTL loan interest of £4,000, he/she would currently receive £1,600 tax relief. This will drop to £1,400 from April 2017 and at the rate of £200 per annum until 2020 when the rules will be fully phased in and only £800 tax relief will be available.
There could also be knock on effects with the loss of child benefit for those with taxable income exceeding £50,000.
But it would be wrong to think that these new rules will only impact upon 40% taxpayers. In the case studies at http://www.propertytaxadvisers.co.uk/case-studies/4591698202 I highlight how individuals currently well below the 40% tax threshold (£43,000 in 2016/17) will be thrust into the 40% tax bracket by these changes and, subsequently, be detrimentally affected.
It is my understanding that the new rules will have an impact on the calculation of taxable income for tax credit purposes. If this does, indeed, prove to be the case, landlords who are not even liable to tax at present could find themselves to be worse off in that tax credits will reduce and tax may become payable.
As these new rules only apply to individuals, operating via a company may be an option. But as CGT and SDLT would, most likely, be payable on transferring over an existing portfolio into company ownership, tax planning advice should be sought. It is not simply a case of saving income tax by operating via a company but how do you then get the profits out of the company.
As an experienced tax professional, I never really thought that the legal challenge headed up by Cherie Blair QC stood much of a chance. It appears that an appeal is unlikely.
With less than 6 months to go until the 1st phase of the rules become operational, it is time for those landlords who had been pinning their hopes on a Cherie Blair inspired government U-turn, to start planning for the future.
Unfortunately, it is likely that most landlords will find themselves worse off than in years gone by regardless of any tax planning undertaken. However, understanding how the changes will impact on you personally and keeping the taxes as low as possible (as many landlords who I have already advised throughout the country will testify) should now be the goal requiring your earliest attention.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
BLOG INDEX - PLEASE SCROLL DOWN TO VIEW INDIVIDUAL ENTRIES.
How SDLT could change how rented property is owned by couples/civil partners.
CGT Reliefs on homes to be significantly restricted from 04/2020
Mortgage Interest Relief Restrictions - Are you ready?
Making Tax Digital (MTD) & the cash basis for landlords
Landlords lose legal challenge over BTL tax changes
When the sale of a property will be liable to Income Tax rather than CGT
CGT on BTL to be taxed as income - Don't worry, it is not going to happen
The Statutory Residence Test - Working full-time abroad
Replacement Furniture Relief.
How flexible are your pensions savings?