All you need to know about Section 24

All you need to know about Section 24

Thousands of buy-to-let landlords are in for a shock when they get their tax bills for the 2017/18 financial year. In what has widely been described as an ‘assault’ on landlords, the government is gradually phasing out the 100 percent tax relief on mortgage interest and other finance costs that landlords previously enjoyed.

 

What’s changing?

Between April 2017 and April 2020, the 100 percent tax relief on mortgage interest will fall to 75 percent, then 50 percent, then 25 percent and finally zero. Once the relief hits zero, it will be replaced with a 20 percent tax credit that is applied to the taxable profits that landlords make on their properties.

 

Who will it affect?

Landlords who are in the higher and additional rate tax brackets – perhaps because they are in employment, have a very profitable property business or earn income from other sources – will suffer the most pain since they are waving farewell to tax relief at 40 percent and 45 percent.

But basic taxpayers may also be affected because as those with income close to the threshold could find that they have been dragged into the higher-rate tax bracket as a result.

The landlords who are likely to get the biggest surprise, however, are those who have no knowledge at all of the changes that came in with Section 24 of the Finance Act 2015. Research undertaken in March 2017 by referencing service Tenant Referencing UK suggested that as many as 1.4 million landlords were unaware of Section 24 and what it would mean for their rental profits.

Vik Tara, a landlord, letting agency owner and chief technology officer of proptech consultancy PropCo, says: “Many buy-to-let landlords are heavily geared and, if they haven’t planned for, or are unaware of, the changes, then the increase in tax could run their portfolio into unexpected losses.”

 

What are some landlords doing to mitigate the effect?

Some landlords are selling properties as part of a strategy to reduce their gearing. Typically they are divesting properties with the lowest yields in order to pay down debt on other investments. A survey by the NLA, published in January, found that 20 percent of its members plan to reduce the number of properties in their portfolio during the course of 2018 – the highest level of intended property sales in 10 years.

Research by estate agency and property services group Countrywide also shows that landlords are offloading properties, particularly in expensive areas. Significantly, the number of homes on the rental market in London tumbled by 21 percent year-on-year in 2017.

 

What are the options for landlords?

One way landlords can potentially mitigate the impact of the Section 24 clauses is by incorporating their property business – that is, setting up a company and transferring the ownership of their properties to the company. This could trigger upfront capital gains and stamp duty land tax charges, however, which is why there is more of a trend for landlords to buy new homes in a company than to move existing properties into a corporate envelope.

Ian Naylor, a partner at Staffordshire solicitor firm Bowcock & Pursaill, which specialises in tax planning, also points out that, while transferring property interests into a limited company could be a way for landlords to ease their tax burden, it is not so straightforward for them to draw capital from the company in future. “It also comes with the burden of more reporting paperwork, such as the preparation of annual accounts,” he adds.

The reality is that it is still early days in terms of assessing the impact of the Section 24 changes on landlords’ behaviour and the rental market more broadly. Nevertheless, the full impact, when it comes, could be significant not only for landlords, but also tenants, which is why the NLA is lobbying the government for a policy rethink.

 

What’s the NLA view?

Taxing Homes, a 2017 report commissioned by the NLA and prepared by Capital Economics, predicts that the average buy-to-let property would be £850 per year less profitable once the Section 24 policy is fully implemented, with landlords clawing back 50 percent of that loss through rent rises. Rents could be pushed up by seven percent nationally over four years – the equivalent of £250 a year. The report also estimates that buy-to-let-backed private-rented-sector stock could fall by 46,000 properties by 2020/21, with landlords deleveraging by almost £8bn. Ultimately, it might not be landlords who get the biggest shock from Section 24, but the UK economy as a whole.

To download the Capital Economics report and to find out more about the impact of the Section 24 changes on landlords, see: www.taxinghomes.co.uk

 

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7 thoughts on “All you need to know about Section 24

  1. as in most successful businesses the lower the gearing the more likely the success, particularly on down turns, how many highly geared landlords will be forced to off load when the inevitable interest rate rises arrive, they wont need help from government policy to see the error of their ways, so lets all look at the bigger picture here

    1. I’m not sure what you mean about the “error of their ways!” It’s obvious that the richer you are the easier things are, and people trying to make their way in life need to borrow….

  2. I have given up my employment now & me & my husband now live modestly on his state pension and 5 buy-to-let properties in the lower end of the market. So this government wont be getting any more tax out of me!

  3. Given the past few years recovering property values from the negative equity of 7 years ago , time to sell at these high prices to reduced to 50 % gearing or the tax will wipe all profits out
    Higher rents , as the private rented sector declines in unit numbers will give the private landlord a more stable rental income with less work
    Thanks Goverment

  4. This law is so unjust and unfair. Why mortgage interest cannot be treated like any other expense?When one pays bank overdraft charges it is considered to be an expense but not the mortgage interest. The most unreasonable and illogical piece of legislation!

  5. The draconian S24 tax changes clearly demonstrate an ‘out of touch’ UK gov who ensure the elites (those with money and no need to borrow) are unaffected. Many years ago I was advised to leave pension plans alone and go into ‘Buy To Let’ as a long term option in terms of capital appreciation and finally a pension. Moving the goal posts on those already committed to mortgages / providing stable and long term homes for people is as usual sort term term thinking! Mrs Thatcher in the early 70’s begun the process of selling off huge amounts of social housing which has since created the need to rely heavily on the private rental sector to bridge the housing gap, particularly for those on benefits, having mental health, disabilities or are vulnerable – being the case with some of my tenants, whom would never be able to obtain a mortgage and rely on rented accommodation. Not only has our elite Gov moved the goal posts on existing landlords that had committed to finance for their properties, they then – just for good measure- ensure that moving ones BLT business over to a Ltd Co attracts capital gains and stamp duty! One does not need to be an expert to see whats already happening in putting further pressure on local Councils in trying to source much needed family homes, with many landlords already evicting and selling and or putting up rents to cover the S24 changes! Other landlords have been changing over to holiday lets, due to the Gov providing them with tax incentives! It’s not holiday homes required in the UK, it’s housing for families that’s desperately needed!

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