Retired landlords living in Spain who derive an income from buy-to-lets in the UK

Hi.

As someone who rents out property in the UK and is going to be greatly affected by 'Clause 24' of the Finance Act, I would like to know if there are any British people living in Spain reading this site who derive an income from buy-to-lets in the UK and who have BTL mortgages. I am currently lobbying Parliament in an attempt to get reversed what is effectively a tax on part of our turnover (finance costs are going to be disallowed in calculating profit from April 2017) and it would be helpful if I could also give some real-life cases of expats facing these issues. For example, if you pay a significant amount of interest and are currently a basic rate taxpayer you may be pushed into being a higher rate taxpayer, despite having no increase in your income. This could jeopardise the income you need to live on in Spain. So if anyone is in this position and willing for their situation to be used as an example, can you please let me know.

Thanks.

Was the intention of this change to release more properties into the market place given the lack of properties available in the UK,  eggcup, and to limit the number of properties being bought for investment purposes, in which case if this is not being brought in until April 2017 and staged over 4 years, doesn't this provide enough time to dispose of properties for those who have large portfolios and for whom this business model is no longer sustainable?

Also I noted the following:

Policy objective

To make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years.

Thanks for bringing this to our attention eggcup. I don't know I missed this important news, It's not been publicsed at all well has it.

The govenment had a consultation a few years back on whether or not to scrap the personal allowance for expats, this would of had a similar effect, thankfully this idea was scrapped. It would seem this is the latest attempt to cool the BTL market and at the same time penalise non resident landlords.

I've read the document in question - I can't make out if it's just those people with specific BTL mortgages that are effected, and those that have just rented out their ex family home with a existing mortgage  will be exempt? 

When we rented out our UK home we told the mortgage lender and had to pay a little more, I'm wondering if this in effect turned it into a BTL mortgage - I need to seek advice

Hi ads. The wording in the Summer Budget is pure sophistry. The wealthier landlords don't need mortgages and so won't pay a penny more in tax. The same is true of institutions which own buy-to-let.It is an attack purely on unincorporated 'private' landlords who have mortgages. The Government is calling those who OWE the most the wealthiest.  They also say it will 'only' affect one in five landlords (uh, about 400,000 plus landlords) and these will be the ones who have expanded and taken risks to make their businesses a success and at the same time provide much needed housing.

Team GB: I can check out your point if you like, but I believe you will be caught with this. If your combined total income - but you now have to add the interest you pay out to the mortgage lender as your income (bizarre, but true) - comes to less than the basic rate threshold (around £42,000) you won't be any worse off as the Government will kindly 'gift' you 20% 'tax relief' back.  But if interest rates rise, your 'fictititious income' will grow as your real income reduces and you will be taxed on that. You can even be taxed on a loss, making this an effective infinite tax rate.

It has been pretty well publicised and there is quite  a strong campaign going to get it looked at again, before it kicks in.   Any loan for which you currently claim interest in order to reduce your tax liability will be caught by the new rules.   It is not specific to BtL mortgages.    It does seem totally bizarre that people will be taxed even if they are not actually making any profit.   It seems almost as though it is being thought of as the old Miras scheme, where everyone with a mortgage actually benefited from the tax relief.   The reality is that BtL is a business, and landlords will lose the ability to claim the full costs of running a premises.     The best place to go to see what is going on is the National Landlords Association:  http://www.landlords.org.uk

You have to pay to see the full content but you can probably see enough on the public bits to answer your questions.   

Thanks for the info Roly

I have Sky news on all day, read the Guardian and take a real keen interest in politics but ths is the first I've heard of it!

Thanks for the offer of help eggcup but I need to speak with my advisors, I can't beleive they are going to add the interest back on to your income - what a convoluted mugging. 

I bet the Spanish Tax advisors are all over this like a rash - If you are a Spanish tax resident YOU are allowed to ofset mortgage interest  - perhaps the hacienda will be giving refunds after all LOL

 Thanks for your reply Eggcup.

Not trying to be judgemental here but a few more questions relating to the wider picture Eggcup...

1) Is this a means of stopping the BTL market in the UK from overheating, which also has a knock on inflationary effect on house values, until such time as the building program makes up the shortfall of housing supply? Or do you suspect that this will have little impact on the housing market given you have identified 400,000 plus landlords?

2) Is this also an indirect way of curtailing risk from Banks' lending IF the overall amount owing is growing at an exponential rate again?

3). How does the tapering effect of 75%, 50%, 25% work? Doesn't this limit the impact over a 4 year time period?

4) Will tax residents in Spain with UK mortgages be dealt with differently in any way?  

Hi ads.

Taking each point in turn:

1) Is this a means of stopping the BTL market in the UK from overheating, which also has a knock on inflationary effect on house values, until such time as the building program makes up the shortfall of housing supply? Or do you suspect that this will have little impact on the housing market given you have identified 400,000 plus landlords?

The move creates no new housing. It is likely to lead to many properties being sold, and landlords usually prefer to do this with vacant possession to maximise the price.  This will lead to the displacement of tenants. Some houses will be sold on to other (more likely incorporated) landlords, in which case the Government achieves nothing but causes disruption. Others may be bought by owner-occupiers in which case the properties are lost to the private rental market where there is ever-increasing demand. Displaced tenants may then have to go to expensive B&B accommodation for quite a long time.

The building programme will never go fast enough to keep up with demand and now private landlords will stop investing in new-builds and in converting commercial properties, so where the Government should have been incentivising development in all tenures, they are stopping private landlords dead in their tracks. There is now massive distrust amongst (usually Tory-voting) landlords so many will leave the market, if they can.

Mark Carney was concerned that if, for example, interest rates rose steeply, landlords would suddenly put lots of properties up for sale, leading to a glut and a house price crash. George Osborne has introduced a policy which is likely to lead to that exact scenario, with Clause 24.

2) Is this also an indirect way of curtailing risk from Banks' lending IF the overall amount owing is growing at an exponential rate again?

It is recognised that corporate lending carries more risk than unincorporated lending, hence the higher interest rates attached and corporate lending is exempt.

3). How does the tapering effect of 75%, 50%, 25% work? Doesn't this limit the impact over a 4 year time period?

The tapering in effect brings in an outrageously unjust tax measure in stages. As many landlords are in it for the long haul, may have properties which provide a reasonable income but are in negative equity and/or have leveraged (which was a perfectly acceptable model up until the 8th of July Summer Budget), they could be made bankrupt with insufficient funds to be able to exit gracefully from the market.

4) Will tax residents in Spain with UK mortgages be dealt with differently in any way?  

There has been no statement regarding this; from which you may surmise that there is no difference whatsoever and many Spanish residents will be affected in the same way as non-resident ones. If you derive an income from your rental properties and you pay finance to service any mortgages in order to derive that income, you will no longer be able to offset this cost, it will be treated as income rather than an expense and you will be taxed on a 'fictitious profit.'

For an overview of the issue, visit this site:

http://saynotogeorge.co.uk/

The NLA and RLA have been pretty useless and have been fobbed off by Government and gained nothing via their negotiations. A legal case has now been launched and pretty soon there is likely to be a second fund-raising stage to progress the case further. £50,000 was raised by landlords in one week to take this to Judicial Review. Legal action is currently the only option as the Government will not listen to reason.

Everyone should make expats aware of this and get them to write to their MPs in their British constituencies. You can also sign the petition against it - the link to this will be on the 'saynotogeorge' site.

I am interested in hearing anything from anyone who believes they will be affected by this. I want to gather some quotes for something I am working on with regard to the campaign. So far, expats have been invisible from all discussions of the measure and I am sure you would like to hear your voices heard. This could ruin many people's plans for their old age.

Thanks Eggcup.

This is so confusing, as (according to this article http://www.bbc.co.uk/news/business-35108952)  Mark Carney has expressed his concern that the BTL growing market places the UK at risk of financial instability and it goes on to imply that an annual survey of household finances found that almost a third of households would have to reduce spending, work more or alter their mortgage payments if rates rose by 2 percentage points without any increase in wages, and yet in the next breath the inference is that he has no intention of allowing the Bank rate to rise in the immediate future. So his concerns re instability are obviously longer term concerns.

Does this therefore lead you to conclude that the risks of BTL for those requiring finance, given the ongoing insecurities associated with global recession should not be taken lightly, especially if the Govenor of the BoE has to increase the Bank rate IF inflation starts to take hold in the longer term? Have these alternative actions to disincentivise BTL therefore become necessary since they (the BoE) have no means of curtailing Banks from lending to "potential landlords" in the interim?

Hi ads.

Nobody requiring finance should ever buy a BTL property again, while Clause 24 is still on the statute books. This is because with each interest rate rise the landlord is deemed to have a higher income despite having an actual lower one. It introduces the notion of 'fictitious profit' on which someone is taxed. You are taxed on an imaginary income. It is too risky now to take out finance under such a system. I know a teacher who had a couple of BTL flats who has sold them already because of Clause 24 because it wouldn't have been worth her while anymore - the interest she was paying out to the mortgage lender for her small BTL business, having been redefined as profit, took her into the higher tax rate and made her BTL business unviable. She had intended to use it as her pension. For portfolio landlords with lots of properties and leverage at, say, 75%, may be receiving a net income of £40,000, but because of interest costs being added to income, could be defined as earning £100,000 and be taxed on that. For many their current effective tax rate may be 25% now (if they are just in the higher rate), but become 50% with no actual change in their income. This is why it is being called an 'Alice in Wonderland' tax. There is no justification for it. If there were, then it would have to also be applied to corporates buy-to-let and holiday homes - but they are inexplicably exempt. This is discriminatory and indefensible. Also, to quell a market you can't introduce something immoral.

Just to repeat my request: if anyone can write a few sentences on how this will affect them or how they are worried about this and allow me to take their quotes and use them, that would be helpful as I am very involved in the campaign against this and I want to make visible the plight of expats in Spain who will be adversely affected. If anyone knows anyone who would be willing to be quoted that would also be good.

Educative posts are all in this scenario Eggcup so I wish you good luck in your endeavours.

As for immoral authority.... I think many posters on EOS could write a book on the subject!!! :(

Hi Eggcup

Any one needing up to date info on this tax grab and its consequencies should look on property118.com

A tax dreamed up by a geography graduate, no economic training what so ever.

Spreadsheets are available from above website showing interactive results of tax grab, income, expenses etc We havent increased any rents in over 8 years but are now informing tenants that annual increase will be levied to pay for this tax. This tax grab is touted as only affecting rich landlords paying higher rate tax, however as financial business costs are not considered a business expense the result will be a percieved increase in income of the amount of mortgage/loan interest payment. This will push many lower rate tax payers in to the higher rate of tax but with still having to pay the mortgage will have no money left to pay the new higher rate of tax. This is simple arithmatic. 

Landlords only have rental income, with increased costs there will be no alternative but to increase rents or reduce maintenance. Or go bankrupt and have homeless tenants and rents rising even higher due to less supply of property.

The end result will be felt by the tenant. All tenants and landlords should be complaining to their MP about this tax grab and have it removed

Eggcup if you want more details PM me.

Cheers

Thanks cbrammeld.

What I am really looking for is any statement from someone living now in Spain or France, who depends either wholly or partly on their UK rental income, who has UK BTL mortgages and, for example, may be left with not enough to live on in Spain/may have to sell up in the UK and have their plans in tatters etc. I need this for the role I have in the UK campaign against this.

If anyone can write a short reply with this kind of thing - explaining the effects on them, that would be great.

As you say, they should use the spreadsheets on Property118 - which are very simple to use - if they are unsure whether or not they will be affected.