Section 24 is also known as ‘the tenant tax’. Announced in the Summer Budget 2015, Section 24 tax began rolling out in April 2017. The gov.uk website explains section 24; “The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income Tax”.
The new section will leave 28% of landlords having to subsidise their rental properties. It came into affect in 2017, but has been slowly rolling out. By April 2021, the changes will have taken their full affect. This means that mortgage interests can no longer be tax deductable. This will change how much profit landlords make and may even make landlords reconsider letting out their properties. There will be a rise in landlords selling their properties.
Who will Section 24 affect?
According to the gov.uk website, you will be affected if;
• You are a UK resident or non-UK resident landlord that rents out a property in the UK
• You are a UK resident individual that rents out a property overseas
• Anyone who lets such properties as a partnership
• “Trustee or beneficiary of trusts liable for Income Tax on the property profits”
• All landlords with finance costs will be affected, although how much you are affected may vary
However, if you are part of an either UK, or non- UK resident company, you will not be affected. Neither will landlords of furnished holiday lettings.
The finance cost restriction.
The finance cost restriction will include the following; interests on mortgages, loans, alternative finance returns, overdrafts, premiums, discounts.
Financial costs will no longer be taken into account. The gov.uk websites says;
“Once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.”
This will result in owning properties to let, becoming far less attractive. The profit will drastically drop and landlords will be left with a lot to consider.
How the phasing of Section 24 works.
In April 2017, percentage of finance costs deductable from rental income dropped to 75%, whilst the percentage of basic rate tax reduction rose to 25%.
In April 2018, the percentage of finance costs deductable from rental income dropped to 50%, whilst the percentage of basic rate tax reduction rose to 50%.
In April 2019, the percentage of finance costs deductable from rental income dropped to 25%, whilst the percentage of basic rate tax reduction rose to 75%.
In April 2020 to 2021, the percentage of finance costs deductable from rental income will drop to 0%, whilst the percentage of basic tax reduction will wise to 100%.
What can landlords do?
It would be advisable to go and seek advice from a tax specialist and an accountant. As this will be affecting the majority of landlords, in particular ones that have any loan or mortgage interests on their buy to let properties, it is no use ignoring this issue. It is time to take action now.
It would be wise to reassess your finances, seeing how high your taxes will be, looking at your financial outgoings, and seeing where you can cut costs. Other options would be to transfer the property ownership into a partner’s name if they come under a lower tax threshold, or establishing your own buy to let company.
If you need a handy guide on how to work out your income tax and a way to work out your rental income, try this handy guide on the HMRC Gov.UK website.
You should then look at your current financial situation, the interest rates of your mortgage and seek advice from a professional. Property is becoming a far less attractive investment due to the new legislation and section 24.
If you decide that the new section 24 will leave you with more hassle than what letting out your property is worth, you may want to consider selling up. BuyMyPropertyForCash buys properties, including tenanted properties that estate agents would struggle to sell. To learn more about how we can help you sell your property, do look at our website.