I mentioned punitive tax rates in my last post and some of you might be wondering how bad it has to be before you do something stupid like fall for a scam.
Well here is a simple real life example that could happen to anyone that has a run of repairs.
Rent – £10,000
Interest £5,000
Xps £4,500
Cash profit £500
If they are an individual/joint owner landlord, higher rate taxpayer and this is a residential property they will have a tax bill of:
£1,200
That’s a 240% tax bill!
Now for this landlord to be higher rate they must have other income and so would likely simply supplement the bill from other income. What though if this was 10 times over for a larger portfolio? Is it fair to expect a landlord to find £12,000 in tax when they only made £5,000 of profit?
This is why landlords are doing stupid things! I’m not condoning it at all but we shouldn’t be surprised when they do. Company ownership can be of use to some but not all and getting £100k of rents in to a company isn’t as easy as you might think (Property 118 getting their stop notice from HMRC is a good indicator of where things went on this!).
What should people do then? Get to grip with their figures and do some modelling. If in this example the taxpayer is about to give up their day job then the problem could be fixed! If they don;t expect interest or repairs to be this high again then great! If they haven’t put rents up in 10 years (happens more than you’d think!) then that will help as well!
Get your numbers and look at your mid to long term plans before doing anything big!