If you’re a buy-to-let landlord, being aware of Section 24 and what it means for you is crucial. However, many are still in the dark when it comes to this controversial amendment to UK tax law, which could mean they are in for an unpleasant surprise when the time comes to submit their tax returns.
As accountants for buy-to-let landlords, we’re always on top of the latest legislation, including Section 24, also known as the ‘Tenant Tax’, as we understand the implications this has for our clients.
Take a look at the changes you can expect to see in April 2020 in the property sector.
What is Section 24?
The first thing you should know is “what exactly is Section 24?”.
This change was announced in 2015 by the then-chancellor George Osborne, and introduced in 2017. Part of the Finance Act, Section 24 changed how landlords gained tax relief on mortgage interest – its end goal means landlords can’t claim a reduction on their income tax payment by offsetting the mortgage interest costs.
This legislation is still being implemented, as it had four different phases, with the last one being in the tax year of 2020/21.
Before 2017/18, landlords and investors were able to offset 100% of their mortgage interest against the property income. In the years that followed, however, the amount of interest that could be offset started to drop – it was 75% in 2017/18 (the remaining 25% was available as a basic rate tax reduction), 50% in 2018/19 and 25% in 2019/20.
In the tax year of 2020/21, all costs will be available as a basic rate tax reduction and the mortgage interest costs won’t be deducted from your taxable profits anymore when it comes to calculating the tax due. This could mean many landlords’ tax bills will increase. Instead of mortgage tax relief, there will be a 20% tax reducer in place – so, 100% of costs will be restricted to 20% tax relief.
In short, Section 24 means that buy-to-let landlords will be taxed on both their profit and on their gross monthly income as well.
Why is the Government Implementing Section 24?
The decision behind Section 24 is to help first-time buyers get on the property ladder, as well as encourage landlords to become professional businesses. The government made a few changes that deterred competition between landlords and property investors, one being the 3% stamp duty surcharge on additional properties (like a second home) and the other being Section 24.
It’s expected that the legislation will also boost the stability and viability of the sector. After all, the government aims to prevent the top property investment earners from claiming the biggest tax relief, which means that the effect of Section 24 on individuals with small portfolios should be marginal.
Who Does Section 24 Affect?
Not all landlords will be affected by Section 24. If you own a property that you’re renting out but have no mortgage costs, then you don’t have to worry about this legislation. Your tax returns and rates will not change. However, Section 24 will impact you if you have a mortgage and fit into one of the following categories:
- Resident in the UK and own residential rental properties, no matter the country
- Non-UK resident with residential rental properties in the UK
- Partnerships and trusts that own residential rentals
The real impact of Section 24 will be felt by those who fall into the highest tax bands of 40% and 45%, as they will have to pay more tax. Additionally, if you’re in a higher tax bracket, this can have a knock-on effect on your child tax credit assessment and student loan repayments as well.
Landlords in the 20% bracket may also have to pay more if their total income (a combination of their rental properties with other revenue) exceeds £45,000.
Of course, because everyone’s situations are different, it’s best to seek the professional advice of contractor accountants to understand how Section 24 will impact you personally.
Concerns About Section 24
Many landlords are concerned about the effects of Section 24. Millions of people will feel its impact – or are already feeling it – which means some landlords will have to reconsider whether staying in the market is the right decision for them. Should a large number of landlords exit the property market, this could lead to a shortage of rental properties, which, in turn, could lead to increased rents and higher levels of homelessness, as people may be unable to pay for housing.
While the government believes that the impact of Section 24 on landlords will be limited, the truth is that anyone with a loan or mortgage interest on their property will be affected. Smaller portfolios may not be impacted as much, but other landlords will likely pay more taxes than what they receive in net profit, which is troubling.
Another major concern about this tax relief change is that many landlords will look to manage the effects of Section 24 by increasing rents – however, if tenants are unable to afford the rising costs, property owners may have to sell part of their portfolio or even leave the sector entirely.
What Can Landlords Do to Negate the Impact of Section 24?
If you’re paying mortgage on a rental property, then you should look into ways to minimise the impact of Section 24 or even negate it completely. You can accomplish this by changing the way you do business. While the following options may not be the right ones for you, as each individual’s circumstances are different, they can help you to understand your alternatives a bit more.
We can also help you to learn more about Section 24 and what you can do to minimise or negate its effects, so don’t hesitate to send your enquiries to Gorilla Accounting today.
Run a Limited Company
For many landlords, incorporating their business is the right option. While there can be some downsides to running rental properties through a limited company (including a higher administrative burden), this also brings many benefits, including the ability to avoid Section 24.
This is because mortgage interest payments are considered a business expense when you own a limited company, so they can be offset against your profits. Other benefits include a lower tax rate and indexation allowance.
Transferring properties into a limited company, however, counts as a sale, which means you would be eligible for Stamp Duty and would have to pay capital gains tax, which can be more expensive than the money you lose through the reduction of mortgage interest relief. In addition, personal allowances and annual exceptions would be gone.
It’s also important to consider that getting a loan when you run a limited company for buy-to-lets can be more difficult to obtain – and can also be costlier. Another thing to take into account is the set-up costs for limited companies as well as the admin involved.
Because we’re limited company accountants, we can easily help you if you’re interested in incorporating your business; or even if you just have questions about the switch. We’ll take care of all paperwork and free up your time to focus on your property business.
You may also want to sell properties that are no longer profitable in order to reduce the size of your portfolio. This can help you to cut costs (such as fees for lettings agents and maintenance costs) to offset the extra tax you’ll have to pay under Section 24. Getting rid of less lucrative properties can also allow you to pay off the mortgages of your other more profitable homes, which would ensure Section 24 didn’t apply to you.
Invest in Commercial Property
Some landlords opt to avoid Section 24 by diversifying their portfolio and opting to purchase commercial properties as well, instead of just residential. Investing in these types of properties means you won’t incur the tax relief penalties that you’d pay with residential properties since the amendment only applies to them.
Convert the Property
Instead of renting residential properties, you can always change their end-use. For instance, if you rent a house or flat as holiday accommodation or on Airbnb, for example, you can avoid the impact of Section 24. This would require a bit of admin and may not be the right solution for your specific situation, so make sure to speak to a specialist accountant that can help you to stay compliant with the law at all times.
Stay on a Lower Tax Bracket
There are several things you can do to avoid paying higher percentages of tax, including raising your pension contributions voluntarily. This means a large part of your income would be subject to a 20% tax rate instead of 40%. You can make charitable donations under the Gift Aid scheme as well, which will keep you on a lower bracket.
Pay Off Your Mortgage
This is only possible if you’re able to pay your mortgage, but it can be a great solution since Section 24 won’t affect landlords who have no mortgage interest to pay. While your bank account may take a hit in the short term, it can be beneficial for you in the long run, especially as you would see a smaller tax bill because you wouldn’t have to pay interest as well as tax on that interest. If you can’t pay your full mortgage, consider reducing it by making larger payments every month.
Transfer Property to Spouse or Partner
Another way to try and mitigate the effects of Section 24 is by transferring your buy-to-let property to your civil partner, husband or wife if they are on a lower tax bracket. It’s crucial to confirm that this additional income will not send them into a higher bracket before you do anything, however.
So, What Happens After April 2020?
During the last implementation stage, which happens during the tax year of 2020/21, one hundred per cent of mortgage interest is charged at the basic rate, with the tax relief on mortgage interest capped at 20%. So, section 24 will be fully implemented after April 2020 and it’s possible that some landlords (those in higher tax brackets) will have to pay more tax than the income they receive.
However, we’ve mentioned the challenges and issues that Section 24 brings, but are there any opportunities that landlords can benefit from?
For instance, Section 24 may help landlords to finally take that step to diversify their portfolios. With the possibility to invest in commercial properties as well as holiday rentals, individuals may see a boost in income. By trying to avoid Section 24, buy-to-let landlords may also finally decide to incorporate their business and become the director of their limited company, which can offer a whole host of advantages as well.
While this can be small comfort to some, especially those with larger portfolios, it’s possible that, moving forward, landlords with a smaller number of properties will either not feel the impact of the amendment or will have the chance to benefit from a different business model or structure.
Contact Gorilla Accounting to Learn More
At Gorilla Accounting, we understand that legislation changes, including the controversial Section 24, can be overwhelming, so we’re on hand to help buy-to-let landlords stay compliant and maximise their profits.
Our pricing is simple and flexible and perfect for businesses of all sizes. After all, we’ve been providing accounting for contractors for many years and understand that, if you’re just starting out, you don’t want to break the bank.
So, if you only have one or two properties and are a private landlord, you will only pay £25 + VAT per month – if you chose to incorporate your business, you’ll pay £40 + VAT monthly. With competitive prices such as Gorilla’s, you won’t have to worry about going over budget.
Don’t hesitate to get in touch today on 0330 041 6089 if you want to know more about Section 24 as well as any of the other services we offer, from our self-assessment tax return accountancy to our sole trader accountancy.