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Landlords Despair: Taxation of Property Businesses

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Newsletter December 2015

This month’s newsletter includes articles that highlight the following:

1. Tax and business issues: tax changes for landlords

2. 30 December filing deadline,

3. Information on the launch of help to buy ISAs

4. Repaying employers for private fuel.

5. Tax Diary December 2015/January 2016

Landlords despair

On the 8 July 2015, George Osborne announced a number of changes to the taxation of property businesses. Without a doubt the most impactful change is the loss of higher rate tax relief for finance charges, which includes mortgage interest. What he didn’t explain was the not so gentle push of many landlords, who were previously basic rate tax payers, into the higher rate tax band.

Landlords Despair

Consider the fate of Joe who has built his property rental business by maximising the use of low interest rate mortgages – in accountant speak he is highly geared.

He has built up his rental business profits (after deducting costs excluding mortgage interest) to £120,000 a year. All his mortgages are interest only and the annual interest charges are £100,000. He is content to manage on the modest £20,000 income that this provides as he is in the business for the long term – nursing long term growth in the capital value of his property portfolio.

Up to the tax year 2016-17 he can deduct the £100,000 from the £120,000 and pay tax on the difference. For 2016-17 this will amount to just £1,800.
After 5 April 2017, new legislation will disallow an increasing percentage of the mortgage interest as a business expense, until by 2020-21 none of the £100,000 will be allowed as a deduction when computing tax payable. At a stroke, and with no change in property income and outgoings, Joe’s taxable profits from his property business will increase from £20,000 to £120,000.

In this way Joe will become a higher rate tax payer and lose much of his personal tax allowance as his income exceeds £100,000.

Relief for his mortgage interest payments will be given by a basic rate tax credit. For 2020-21 this will amount to £20,000 (£100,000 x 20%).

Unfortunately, even with this tax credit taken into account, Joe’s Income Tax liability for 2020-21 will rise to £19,500 (based on current information available). This is a massive increase and it will consume most of Joe’s property business cash flow.

Fortunately, there is time to plan. We will be working with all our property business clients to mitigate the downside effects of these tax changes. Readers who would like our support should call for an initial consultation sooner rather than later.

A 30th December 2015 filing deadline

One of the more obscure filing deadlines for Self Assessment purposes relates to a claim to have your tax underpaid for a year recovered by an adjustment, an increase, in the PAYE stopped from your salary in a future tax year.

For underpayments year to 5 April 2015, the filing deadline is fast approaching, 30 December 2015.

You will not be able to request this type of settlement if:

  • you don’t have enough PAYE income for HMRC to collect it
  • you’d pay more than 50% of your PAYE income in tax
  • you’d end up paying more than twice as much tax as you normally do

Underpayments that are agreed to be settled in this way for 2014-15 will be adjusted in your code number for 2016-17.

Help to buy ISAs are available from 1 December 2015

The following information is extracted from the Government’s help sheet:

  • New accounts will be available for 4 years, but once you have opened an account there’s no limit on how you long you can save for.
  • Accounts will be available through banks and building societies from Autumn 2015.
  • You can make an initial deposit of £1,000 when you open the account – in addition to normal monthly savings.
  • There is no minimum monthly deposit – but you can save up to £200 a month.
  • Accounts are limited to one per person rather than one per home – so those buying together can both receive a bonus.
  • Only available to individuals who are 16 and over.
  • The bonus is available to first time buyers purchasing UK properties.
  • Minimum bonus size of £400 per person (a minimum of £1,600 savings are required to qualify for any bonus).
  • Maximum bonus size of £3,000 per person.
  • The bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside London.
  • The bonus will be paid when you buy your first home.

Two further points to be considered. Savings can be withdrawn for any other purpose, but then no bonus is payable, and there are complications if you want to open a Help to Buy and a Cash ISA in the same tax year.

Repaying employers for private fuel

Company car drivers should be giving consideration to the issues raised in this article if they are provided with fuel for private mileage by their employers.

With no repayment to compensate for private fuel provided, employees will suffer a significant car fuel benefit in kind charge. Depending on the type of vehicle you drive the annual car fuel benefit charge could be between £1,105 and £8,177; if you pay tax at the basic rate this would add between £221 and £1,635 to your annual tax bill.

It’s worth comparing this tax charge with the cash cost of reimbursing your employer for private mileage.

To do this multiply the private mileage you have logged (or estimate that you will use) in the tax year 2015-16 by the approved advisory fuel rate for your vehicle as published by HMRC. These generally change every three months.

Let’s say that you drive a 1600cc petrol engine car with a fuel scale charge of £4,000. The current advisory fuel rate for this vehicle type is 14p per mile.

In the above example, if your private mileage is up to 5714, (and you are a basic rate tax payer) it will pay you to reimburse your employer as the cash cost of the payment will be less than the benefit in kind tax charge. (£5714 x 14p = £800)

If you are a higher rate tax payer the argument for a repayment of private mileage is even more compelling.

Tax Diary December 2015/January 2016

1 December 2015 – Due date for Corporation Tax due for the year ended 28 February 2015.

19 December 2015 – PAYE and NIC deductions due for month ended 5 December 2015. (If you pay your tax electronically the due date is 22 December 2015.)

19 December 2015 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2015.

19 December 2015 – CIS tax deducted for the month ended 5 December 2015 is payable by today.

30 December 2015 – Deadline for filing 2014-15 Self Assessment online to include a claim for under payments (under £3,000) be collected via tax code in 2016-17.

1 January 2016 – Due date for Corporation Tax due for the year ended 31 March 2015.

19 January 2016 – PAYE and NIC deductions due for month ended 5 January 2016. (If you pay your tax electronically the due date is 22 January 2016.)

19 January 2016 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2016.

19 January 2016 – CIS tax deducted for the month ended 5 January 2016 is payable by today.

31 January 2016 – Last day to file 2014-15 Self Assessment tax returns online.

31 January 2016 – Balance of Self Assessment tax owing for 2014-15 due to be settled today. Also first payment on account for 2015-16 due today.

 

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