Today's budget...

[Earl Aelfheah]

Ian Duncan Smith punching the air was a bit pathetic. It reminded me of Kinnock and his 'we're alright' conference speech moment. *cringe*

[Henry_17]

Yes, much better as the quiet man.

[MrBen]

DaveR Wrote:

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> Re BTL tax changes, is there anything to stop

> people transferring title to a ltd. co., or

> interposing a company as head lease holder, to

> retain the tax benefits?

Nope but then you'd need a commercial mortgage (higher rates usually0, be subject to corporate CGT terms and corporation tax on profits. Plus all the admin costs / hassles of a ltd co.

[Coman]

There are various issues. Firstly there is potential capital gains tax on transfer of the property. This would be payable even though there were no sale proceeds. There is an instalment arrangement which could be arranged with HMRC for the payment of capital gains tax.

If you are not receiving any payment for transferring the property, then there would probably not be any stamp duty implications, although this is more the domain of a solicitor. Re-arrangement of mortgage might be regarded as a consideration received for transfer of property to the company.

The main issue would be how to extract profits without suffering income tax. If profits are about ?10,000 a year or less than probably the profits could be paid out in salary. For higher amounts, the profits would be subject to dividend tax and this could be quite high. Nonetheless, the first ?5,000 of dividend would be tax free. A better saving than current for a higher rate taxpayer. It is not a complete non-starter but it would not suit all situations.

It could work in the sort term, but there is no guessing how the Treasury would react if companies because widespread. It could end up expensive trying to get the buy to let out of the company again.

A full summary of the Emergency Budget is available via our website Coman & Co.

[david_carnell]

I'm still none the wiser how Mr Bens flat has gone from a nice little earner to a loss making enterprise?

Surely now it is just less profitable than it was?

[Loz]

david_carnell Wrote:

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> I'm still none the wiser how Mr Bens flat has gone

> from a nice little earner to a loss making enterprise?

I think I've worked this out. No sure though, so this could be wrong.

Assuming MrB is on 40% tax rate and he had a place that he rented out for ?1000 and paid ?800 a month on mortgage interest.

The old way would be he could knock all 800 off the 1000, leaving ?200 taxable "profit", which is due ?80 tax. So leaving ?120 in his pocket.

The new way, he would still be paying ?800 in mortgage interest, but he could effectively only knock half off the income before tax is calculated, meaning he now pays tax on effective 'profit' of ?600 - so a tax bill of ?240, even though his real profit was only ?200. So he's now paying more in tax than he actually makes in profit and so comes out with an effective loss of ?40.

[miga]

MrBen, could you explain, using hypothetical numbers?

[Blah Blah]

I still think 'loss' is a red herring given that mr Ben still has the property and the equity in the rising value of it. It just means he has to pay ?40 of his own mortgage!

[Jeremy]

I think Loz's example is basically there. A month on month loss is a distinct possibility for many landlords. Bear in mind that after fees/maintenance/etc the chances are (in London anyway) that your current monthly profit is already tiny. It's not a red herring at all, BB.

Yes you could potentially describe it as "profit" if you think the value will rise, but this isn't guaranteed and is of course subject to CGT. Not many private landlords would be willing to take on this kind of risk, so will have to sell. Let's hope they don't all try to dump their proprties at the same time!

[indiepanda]

Incidentally, for those of you who don't rent out your whole property, but just a spare room, I gather the budget was quite good news on that front. The government will increase the Rent-a-Room relief from ?4,250 to ?7,500 a year from April 2016. Hopefully will encourage more people to rent out their spare rooms.

[mikeb]

Back to Loz's point - of course house price gains should be subject to CGT. To be tax-exempt is a massive incentive to "invest" in property versus other investments.

Taking the example, it's hard to feel too sorry for someone who has made net ?200k on their property. As Henry_17 pointed out, the example ignores immobility caused to the individual who hasn't benefited from free money on their current house (maybe because they are younger?) and also cannot buy the ?500k house in NW London.

It would be normal for a CGT system to take account of improvement expenditure, and inflation, but windfall gains should be taxed as with any other asset.

[DaveR]

Just to be pedantic re Loz's example above, the measure introduced means that you can only deduct tax at the standard rate, not higher rate. So, using his figures, ?1000 rent and ?800 mortgage, in the future the tax due will be 40% on the ?200 'profit', and 20% on the other ?800 of 'income'.

I've never understood the vitriol spouted at individual BTL landlords - they're just market players and if it wasn't them it would be commercial landlords - and I very strongly suspect that this is going to have essentially zero effect on London rents. There's been an announcement this morning about easing planning restrictions on industrial sites - I haven't read the detail, but that's much more likely to have an impact on the market as a whole.

[MrBen]

miga Wrote:

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> MrBen, could you explain, using hypothetical

> numbers?

I won't as due to multiple variables involved it's not straight forward. I'm in the 45% tax band, several properties are involved, other sources of income and it depends how I'm financed....

The general point is that many mortgaged landlords whose mortgage interest and maintenance costs were covered by rent each month to deliver a profit will now effectively be making a cash-flow "loss" because they subsidising their property in terms of monthly outgoings. Fine if the capital value of the property is rising but they're not at the moment, property is already overvalued and sentiment can change quickly when liquidity wise people are paying out rather than reaping rental profits.

[MrBen]

Oh and thanks Loz - you are broadly correct with your example.

[bobbsy]

I seem to be alone here, but I don't believe the change to the tax treatment for BTL investment is a good idea, as it sets a precedent for the disallowance of tax deductible expenses.

The basic premise of a business is that expenses are deductible. What we have now is the government saying that for this particular type of business, mortgage interest expenses are not fully deductible, as this is "costing" the government lost taxation revenue, so lets say only a part of this expense is tax deductible in order to claw back some tax revenue. Its just BTL businesses coincide with a sensitive area - housing.

Which business will be targeted next when there is a budget black hole? Shall we say plumbers make too much money, therefore lets disallow the taxible deduction of an apprentices salary, as that is costing the government tax revenue?

Continuing on the budget theme of this thread, the one area that particularly worries me are the proposals to change the pension system, from that of tax free contributions/taxed benefits upon withdrawal, to one of fully taxed contributions and tax free benefits upon withdrawal.

This raises some areas of concern to me:

1) what incentive will anyone have to contribute to their pension investment without tax savings? and if people are not incentivised, the governments of future years will simply face a huge burden of now providing state pensions to entire generations of workers that did not invest in their retirement.

2) if you are retiring in 30 ish years, do you trust that all governments over say, the next 60 years, would honour the committment to allow your pension savings (if, for some reason you did contribute) to be withdrawn tax free? I wouldn't! It will simply be another pot of meney a successive government will view as a source of prompt tax revenue. So there is a massive risk that you will be double taxed.

3) how is it possible to plan in such a changing tax environment?

So, there was a good alternative for people to finance their retirements - BTL properties - relatively skill free and accessible to many. So now that tax relief is being reduced on these...whats left?

[*Bob*]

bobbsy Wrote:

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if you are retiring in 30 ish years, do you

> trust that all governments over say, the next 60

> years, would honour the committment to allow your

> pension savings (if, for some reason you did

> contribute) to be withdrawn tax free?

Which pensions allow savings to be withdrawn tax-free (beyond the 25% lump?)

[DaveR]

"I seem to be alone here, but I don't believe the change to the tax treatment for BTL investment is a good idea, as it sets a precedent for the disallowance of tax deductible expenses."

I'm not sure about that - I don't think the tax position generally of BTL as an individual is comparable to other typical sole trader businesses. If you operate commercially through a ltd co you are subject to the normal business tax regime.

However, there is little doubt that this is a political gesture rather than a considered policy, either from a tax or a housing perspective.

[bobbsy]

Bob, this is one of Osbornes proposals being mooted at the moment - pension contributions being paid from net (taxed) income, and withdrawn upon retirement tax-free. This is what is meant when comments are made about pensions being made into "ISA-style investments".

I, for one, would have no faith, that if paid net contributions now and through my working life, that future governments would honour leaving them as tax-free income during retirement.

[MrBen]

Interestingly I've just read the budget report...and the treasury estimates that only 1 in 7 landlords will be affected.

[bobbsy]

DaveR, ok, so perhaps it forces BTL businesses into a corporate structure. I still think it sets an alarming precedent that the government will pick and choose allowable tax deductible expenses as it pleases. Such a changeable environment would, I believe, discourage small business.

[bobbsy]

So that assumes the treasury estimates only 1 in 7 landlords pay tax higher than the basic rate? Yet this is meant to equalise the playing field? It simply doesn't make sense to me.

The tone of government language now seems to focus on these areas as "costing" the government tax revenue...when in actual fact it isn't costing the government anything, it is simply additional revenue to help balance previous uneconomic polices. Feels to me like the conservatives are now in effect the labour party...I wonder which party will fill the previous conservative hole.

[*Bob*]

bobbsy Wrote:

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> Bob, this is one of Osbornes proposals being

> mooted at the moment - pension contributions being

> paid from net (taxed) income, and withdrawn upon

> retirement tax-free. This is what is meant when

> comments are made about pensions being made into

> "ISA-style investments".

> I, for one, would have no faith, that if paid net

> contributions now and through my working life,

> that future governments would honour leaving them

> as tax-free income during retirement.

Seems every time I get around to (finally) looking at pensions, there's another potential fly in the ointment on the horizon.

I'm just going to have to stuff money under the mattress.

[Parkdrive]

So the National Living Wage, currently at around ?7.20 will be rising to ?9 an hour by 2020. I bet all those on that princely sum are over the moon. In 5 years no doubt council tax, water rates, electricity, gas, transport and fuel costs, just to mention a few, will all rise and make not the slightest difference to the recipients way of life. Osborne you're a star.

[????]

Still a Quid more than Ed Pledged....Osbourne you commie

[Loz]

Not only is Osbourne delivering a ?9 minimum wage, whereas Labour proposed ?8, quids, but is also delivering ?8bn more to the NHS, when Labour only promised ?2.5.

It was a pretty radical budget. Hard to really put a red/blue tag on it - a bit of both, really. Made it hard for Labour to criticise as he nicked so many of their ideas. Maybe it's a longer term strategy for the next election - nick all their centre ground ideas and start pushing Labour left. Corbyn winning (and he's picking up some very valuable union support) would virtually guarantee the Tories the next election, IMHO.