clause 24 confusion

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    clause 24 confusion

    I just can't seem to get my head around this. Is the government going to tax landlords on income before expenses or are they going to disallow tax relief on mtg payments only?

    The change is to introduce a restriction on the relief claimable against loan interest (and associated fees) to 20% of the cost of those fees.

    The associated change (which was introduced very sneakily) is that in order to calculate the tax, the mechanism changes.

    Previously, because the relief was associated with the rate of income tax you paid, you would simply deduct your allowable expenses from your taxable income, which left you with the amount on which you were going to pay tax.
    People would call that profit (which it isn't really) and it seems quite a fair thing to do.

    In future, you take your taxable income and deduct allowable expenses (which excludes interest and associated fees).
    Then you calculate the income tax due on that amount, then subtract 20% of the cost of interest and associated fees as a separate allowance.

    While it affects a lot of people, it affects three groups particularly.
    • Higher rate tax payers pay more tax - which was what the chancellor said he wanted to achieve.
    • Anyone who was a basic rate tax payer, but coming close to being a higher rate payer might find that the change in calculation mechanism moves them into being higher rate tax payers (which doesn't just affect income tax - it changes that rate at which you pay tax on capital gains and dividends for example).
    • Anyone who is highly leveraged might find themselves paying more tax than they have actual income. To take an extreme case as an example, a higher rate tax payer letting a property for the same as the interest on a mortgage on that property would pay no tax today and pay 20% tax in future - essentially paying income tax without the corresponding income.

    The last two consequences weren't, as you can imagine, widely advertised.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).


      Thanks for that.

      I think I'm getting closer to understanding.

      is this correct: mortgage interest payable will no longer be an expense but will be taxed.

      so if a LL has 5 houses and pays £100 pm interest on each that £500 pm moves from the expenses side and therefore no income tax due on it, to the taxable income side putting a LLs earnings up by £1200 pa?

      If this is the case I can't be the only one who will lose out on child benefit payments, college bursaries, and tax credits but at the same time being thrown into poverty. My actual real income would be just over £4400 pa. This can't be right, can it?


        Not exactly.

        Taking 5 houses at £100 a month, lets say the rent is £200 pm (and ignoring tax free amounts).
        You earn £12000 a year, but can deduct £6000 before calculating your tax.
        So, as a basic rate tax payer, you pay tax at 20% on the remaining £6000, which is £1200.

        In future, you would calculate your tax as 20% of £12000, which is £2400,
        but then deduct 20% of £6000 as an additional restricted allowance, which is £1200, bringing you back to £1200 due in tax.

        The problem arises where you are a higher rate tax payer.
        Then your income tax is 40% of £12000, which is £4800, the allowance brings it down by 20% of £6000, which is £1200, leaving £3,600 due in tax (rather than £2,400 using today's rules).
        If the property is only let at £150 a month, the income is £9000, income tax is £3,600 less the £1200 restricted allowance, leaving tax due at £2400 and you only earn £3000 (which is a very high rate of tax).
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).


          Thank you so much for that.

          I'll have to calm my spinning brain down and get in a more chilled frame of mind before I can absolutely understand it.


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