Landlords bear the brunt of recent tax changes

Recent budgets have done little to improve the financial position of landlords. One change stands out above the rest: the loss of higher rate tax relief on finance charges.

Many landlords have concentrated on growing their property portfolios in recent years and, taking advantage of the low interest rates, have borrowed heavily to maximise property acquisitions. In accountant speak, they are highly geared.

This strategy will come back and haunt many followers of this path as the tax relief for loan interest starts to reduce in the coming years. The changes will be:

  • From April 2017, 25% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2018, 50% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2019, 75% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2020, only a basic rate tax credit will apply.

Landlords who only pay basic rate (20%) Income Tax on their property business may think these changes will have no effect on their tax bills, after all, the reduction in the deduction in finance charges is matched by a basic rate tax credit, but they may be mistaken. It all depends on the amount of loan or mortgage interest payments they presently pay and claim against their tax. Consider the following example:

Jo, whose rents for 2016-17 are £100,000 and loan interest is £80,000, will have taxable profits for the year of £20,000. Once the finance costs are fully disallowed, Jo’s taxable income will be £100,000 (not £20,000), Income Tax will be calculated accordingly and much will be taxed at higher rates. She will be able to deduct a tax credit, based on finance charges disallowed, but only at basic rate Income Tax.

If rental profits were her only income, and with no increase or decrease in her rental income and costs, Jo’s tax bill would increase from £1,800 for 2016-17, to £11,500 by the year 2020-21.

This sort of outcome would be disastrous for many landlords in a similar situation. They may be faced with selling property to reduce “leverage” and restore some sense of cash flow sanity to their tax affairs.

Clearly, there is a need to re-examine your investment strategy if your property business is similar to the above example. We can help. There may be possible changes you could make short of outright disposal. The key is to consider your options now.

McLaren racing team lose tax appeal

It is a well-established feature of previous judgements that a fine imposed to punish an organisation should not be treated as tax deductible – the tax relief secured would effectively share out the burden of the punishment with the rest of the taxpaying community.

Which is why the First Tier Tribunal (FTT) decision, allowing McLaren racing to deduct a £32m fine for being in possession of documents belonging to Ferrari, was seemingly out of step with this point of view.

HMRC appealed the FTT ruling and the Upper Tribunal reversed the decision.

In some respects, this addresses issues of common sense as well as the law. If the FTT ruling had held, would we have seen footballers claiming tax relief on fines for bad behaviour? Or tennis players for swearing?

Tax Diary July/August 2017

1 July 2017 – Due date for Corporation Tax due for the year ended 30 September 2016.

6 July 2017 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2017 – Pay Class 1A NICs (by the 22 July 2017 if paid electronically).

19 July 2017 – PAYE and NIC deductions due for month ended 5 July 2017. (If you pay your tax electronically the due date is 22 July 2017)

19 July 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2017.

19 July 2017 – CIS tax deducted for the month ended 5 July 2017 is payable by today.

1 August 2017 – Due date for Corporation Tax due for the year ended 31 October 2016.

19 August 2017 – PAYE and NIC deductions due for month ended 5 August 2017. (If you pay your tax electronically the due date is 22 August 2017)

19 August 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2017.

19 August 2017 – CIS tax deducted for the month ended 5 August 2017 is payable by today.