A clever married couple refinanced their property portfolio to beat the tax changes, proving that the most profitable restructure is not always a tax restructure.
Many landlords have restructured their property portfolio to protect against tax changes over the last 6 years. However, not every restructure has involved a change of how property profits are taxed.
Indeed many landlords are making more money now – having made no change to how they account for their profits – and despite the tax changes.
At Less Tax 4 Landlords we have a saying “Don’t let the tax tail wag the planning dog” and this example I gave at the Landlord Investment Show in London recently is a good example.
We looked at a married couple, who had a £4 million portfolio, with £2 million in mortgages.
It is 2015, so before Section 24, and the portfolio is financed at a 4% interest rate (or £80,000 in annual interest payments).
With a 6% gross rental yield, they are taking £240,000 in rent each year. £48,000 (20%) of this is then spent on tax-deductible expenses. Pay the £80,000 interest and there is £112,000 left in the bank before tax.
| 2015 – Before Section 24 | |
| Annual Rental Income | £240,000 |
| £2 million BTL mortgage at 4% interest | £80,000 |
| Other Tax-Deductible Expenses | £48,000 |
| ‘Real’ Profit | £112,000 |
| Taxable Profit | £112,000 |
It’s before Section 24, so the finance expenses are still fully tax-deductible. Meaning there are £112,000 of profits to pay tax on. As the portfolio is shared equally by two people, they will pay tax on £56,000 each – and are higher rate tax-payers.
Now fast forward to 2021, and Section 24 is fully in effect and interest is no longer tax-deductible, but we can claim 20% of our finance costs as a deduction against tax.
Since 2015, our Landlords have done very well, taking advantage of exceptionally low rates and refinanced their portfolio at 2%. By keeping their mortgages at £2 million, their interest payments have halved to £40,000.
With loyal tenants, they have forgone any rent increases so we still have £240,000 income. They have managed to keep spending to the same £48,000 tax-deductible expenses, meaning that after their £40,000 of mortgage interest, they have £152,000 left in the bank before tax.
Or in other words, compared to 2016 they have an extra £40,000 in the bank before they pay their taxes.
However – because of Section 24, they cannot deduct the £40,000 mortgage finance as a tax-deductible expense, and so are actually taxed on £192,000 – an increase of £80,000 since 2016.
| 2021 – After Section 24 | Change vs 2015 | |
| Annual Rental Income | £240,000 | – |
| £2 million BTL mortgage at 2% interest | £40,000 | Down £40,000 |
| Tax-Deductible Expenses | £48,000 | – |
| ‘Real’ Profit | £152,000 | Up £40,000 |
| Taxable Profit | £192,000 | Up £80,000 |
Based on a 2 person unincorporated partnership, that extra £80,000 will be taxed at 40%. That’s an extra £32,000 in tax. However, we also get a 20% tax credit on our £40,000 of interest. So that’s a deduction of £8,000. Meaning our final tax bill has increased by £24,000.
But we have an extra £40,000 in the bank. So our after-tax income is up £16,000 or £8,000 each.
You can see then why it’s been profitable for many landlords to grow their portfolios through greater borrowing even with the tax changes.
With mortgage rates so low – many landlords have remortgaged, will be seeing strong cashflow, despite the extra tax payments, and the extra tax can be easily offset by switching to a mortgage with a lower rate.
It is also why some landlords are sitting on the fence about restructuring their business from a tax perspective because they have been able to restructure from a finance perspective, and still be better off than they were, before the tax changes.
Of course, I write now after 12 years of record low and decreasing interest rates.
And as interest rates rise, every £1 of tax saving will count for more.
Landlords paying 40% tax or more on their property profit, mortgaged or not – are probably paying more tax than necessary.
If you’re in this position, then I recommend taking our initial assessment – it’s free, and could save you £000s to reinvest in your property business.
As a founding member of Less Tax 4 Landlords and member of our Operational Board, Ben helps coordinate a wide range of services and insights for the PRS.
With an entrepreneurial background in business growth, sales and marketing strategy; his main claim to fame around here is having come up with the company name back in 2015.
He also works closely with experts across the wider financial and professional services industries through his capacity as co-owner and Director of one of the three Less Tax 4 Landlords founding companies; The Key 2 Growth Ltd.
