[Solved] Impact on Child Maintenance calculation of investment property tax rules
Perhaps this may be related to other threads about the inappropriate of the maintenance calculation in certain scenarios.
The taxation rules for investment properties (i.e. those that are let out) are in the process of changing :- over a four year transition period, mortgage interest costs will no longer be deductible for income tax purposes (from the 2020/21 tax year no proportion of such costs will be deductible).
The taxpayer does get an income tax rebate at the basic rate however - the net effect being that higher-rate taxpayers will pay more whilst the impact on basic rate taxpayers will be neutral.
However this also has an impact on the child maintenance calculation as that is based on gross taxable income, which is now increased by the amount of finance costs incurred.
Eg. In my case I have investment property mortgage interest costs of £5,700 per year, and as I pay 12% of my gross taxable income in child maintenance then from 2020/21 (or when the annual review uses that year’s income) my maintenance calculation will £684/year higher than before the income tax changes started being phased in.
I am not any wealthier however as this additional income is not ‘real’ as it has been spent on mortgage interest (in fact, for those that pay higher rate tax they will be materially less wealthy).
It would seem to me that in order for the maintenance calculation to remain the same for the same ‘real’ income, it should be based on gross taxable income LESS undeducted investment property finance costs.
This does seem like a policy change by the government that really hasn't been thought through in many scenarios.
I have wondered whether landlords can move their properties into a property company, and run it as a business that way, rather than owning the companies personally, but it would need proper financial advice for that.
I have the same issue. I have looked at a Limited Company to put the property into, but the Limited company has to purchase the property at going rate and pay stamp duty again at the higher rate, so doesnt make sense. Best to sell and start again.
Once income tax is added to cost of mortgage plus 12% for CM it means money is better left elsewhere as the return is negligible. Plus the income from the house risks adding 25% to the HMRC figure which triggers back pay on previous year.
I do not think there is an answer to the problem and yes the change has happened which has not been thought through with regard to CM - a double hit in effect.
A solution seems clear to me - the 'gross taxable income' notified to CMS by HMRC should be net of any undeducted investment property finance costs. HMRC has the figure to hand as it is on our self-assessment tax returns.
The changes to income tax were aimed at limiting the tax break of such costs to basic rate only, and they achieve that.
Surely the subsequent increase to calculated Child Maintenance - which is payable to the resident parent and not the government - was unintended and has nothing to do with what the tax changes were intended to achieve, and it should be remediated as it can be a significant additional financial burden.
EDIT - I have just spoken to both the CMS and HMRC. As far as CMS are concerned it is right that maintenance is calculated on gross taxable income, and they don't really have an appreciation of the finer points of the taxation changes for landlords. The person I spoke to at HMRC to their credit understood that if CMS base their calculation simply on gross taxable income then the maintenance calculation will as a result be higher. Though HMRC said that any changes in this area will have to be applied from within CMS, as it is CMS that simply access the gross taxable income figure from the HMRC system - i.e. they would have to also access the 'undeducted property finance costs' and adjuct the figure on which the calculation is based.
HMRC said that the best person to talk to would be my MP as it needs an awareness at a higher government level to make sure that this type of anomaly is ironed out, though they did say they would look about in HMRC to see if this issue has been discussed before.
I would certainly speak to your MP, I think DWP are consulting at the moment, so any additional suggestions might just be considered, however faint that possibility is.
One other thought, and I really am just throwing ideas in, but is it worth putting all of the income from your property into a pension - that would get you tax relief I think, and when you are 55, you can take 25% of the pension out as a tax free lump sum. It is complex, so again, you'd need proper financial advice to see if this is a possibility.
Yes I've written to my MP so we will see what, if anything, comes from that.
I also understand the option of putting property income - or indeed any money I can afford to use in that way - in to a pension. This is always an option in general to reduce one's taxable income and therefore also one's child maintenance liability. However what I can't do is specifically put the property finance costs in to a pension (and protect that specific amount from being fed in to the CM calculation) as I don't have that money - it having been paid to the mortgage provider.
I.e. whatever I do in regards to pension contributions, whatever gross income I actually receive (i.e. not put in to a pension) will always be 'enhanced' by the property finance costs for income tax and CM calculations.
Also - not sure if we are allowed to post links - but it seems that there are other knock-on impacts of the HMRC landlord tax changes other than for Child Maintenance :-
That's quite interesting - no problem with you posting that link btw as it's information, not commercial.
I've received a reply from my MPs office saying that they will refer my comments to the appropriate government minister and keep me informed of the response.
Main text of my letter :-
as my MP, I wish to raise with you an issue concerning the calculation of Child Maintenance :-
Root Cause :-
The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of income tax. This change is being phased in by HMRC having started in the 2017/18 tax year, and by 2020/21 it will be fully implemented.
The way this is being applied is that property finance costs will no longer be an allowable deduction against the landlord's property income and will therefore be rolled in to the landlords gross taxable income and thus will be taxed at their marginal rate of income tax. The landlord will then receive a tax reduction at basic rate of such finance costs.
The net effect being neutral for basic rate taxpayers whilst higher rate taxpayers will pay more income tax.
Further information is available here :-
Whilst this HMRC change achieves its objective, and I do not complain at all about its impact on income tax liability, I believe that it has an unfair and unintended knock-on impact on the calculation of child maintenance (should the landlord also pay that) :-
The Child Maintenance Service uses the non-resident parent's gross taxable income as the basis of their calculation of the child maintenance amount that they must may to the resident parent (if applicable).
However if the non-resident parent is a landlord with associated property finance costs, then their gross taxable income has been increased by the HMRC changes I refer to above. As a consequence the amount of child maintenance they are directed to pay by the CMS is increased.
I believe this is unfair because the increase in gross taxable income is only an 'accounting change' applied by HMRC in order to restrict the tax relief on finance costs to the basic rate - it is not indicative of an actual increase in 'real' income. However CMS do not make allowance for such an accounting change and the increased gross income is fed in to their calculation as usual and this results in an increase in the amount of child maintenance that the non-resident parent has to pay.
I believe this is also unintended because child maintenance has nothing to do with a landlord's tax liability, and child maintenance in any case is payable to the other parent and not to any government department.
It seems clear to me that the calculation of child maintenance liability by the CMS should take account of any undeducted property finance costs present in the non-resident parent's gross taxable income (i.e. deduct such costs from the gross taxable income figure and use the remaining sum to calculate child maintenance liability).
If this kind of change may take some time to implement in the CMS's automated calculation, then in the interim I think this issue should be allowed as a legitimate reason for the non-resident parent to apply for a 'variation' in the CMS's calculated amount (along with other reasons currently allowed for a variation).
Any update on this?
I read your property post with interest. I am in the same boat with my portfolio and completely understand the anomaly. Whilst I have not found a solution to it one thing that I do do is spend what I can on refurbishing each property. This in turn then reduces the overall profit on them. That way over time (when the CMS have thankfully gone far away) I will reap the rewards of this by having properties in better condition than now. Also, it keeps the tenants very happy. I also deduct any expense that I can reasonably justify (travel to and from / phone etc etc) with the same intent. One other thing that I have just done is to remortgage the properties onto lower fixed rates - if I'm going to have to pay on the basis of a notional 'income' (that in reality is just an expense) I might as well try and maximise the profit to me rather than to the bank.
I believe that the rate relief issue was brought in by the Gov't in order to professionalise the private rented sector but I think it really just penalises those who are attempting to provide some long term security for themselves and their families.
I hope this is of some help to you.
Hi, I am the OP and wish to provide an update. It's been a long time since I was here, sorry.
OK well I wrote to my MP (refer text earlier in this thread) and he first sent my query to Baroness Steadman-Scott who I think is someone to do with DWP issues in the House of Lords, and he got back a not very helpful reply which essentially simply stated that CM calculations are based on the paying parent's gross income and that there were no plans to amend this in the light of any HMRC changes.
So I then met with my MP and he fully understood the issue and agreed that there was essentially a 'double whammy' of the HMRC changes not only increasing income tax liability (for higher rate taxpayers - as is the intent), but also he understood that it also increased the Child Maintenance calculation. He complimented me on not only explaining the issue clearly but also in suggesting a solution. He also agreed that the response from Baroness Steadman-Scott was unhelpful and that it was not evident that my issue had been properly acknowledged nor understood. He (or his assistant) suggested that it is common for recipients of letters like this to 'skirt' around the issue and as such the nature of the response was not a surprise to them.
My MP then said that the next step would be to submit a 'written question' to the House of Commons (he did explain what that was in procedural terms but I'm not sure I understood). So I waited for a few weeks and then enquired as to the status of the issue. Unfortunately, it seems that nothing had been done in the interim and that this had maybe fallen off his radar. However thankfully my reminder has nudged the issue in to action again and as of last week he has told me that my parliamentary question has been submitted to the Secretary of State for Work and Pensions and that he would keep me updated.
So it remains to be seen what (if anything) will come of it.
However I think it is clear that there is a genuine issue here - and I would encourage anyone else who is impacted to raise the same issue with their own MP on the chance that a greater noise about it might be more likely to generate a response to remediate this inherent unfairness.
I will keep you updated here ...