Latest on Section 24 and Tax Relief for Buy-To-Let Landlords
The latest information about Section 24 and Tax Relief for Buy-To-Let Landlords from buy-to-let-accountants.co.uk
In this blog, you will find helpful information on how Section 24 will affect your tax relief as a landlord, and the possible solution of creating a limited company in order to avoid this. In addition, you will find frequently asked questions with constructive information on where you stand as a landlord under Section 24.
What Is Section 24?
Section 24, which is often referred to as the Tenant Tax, was implemented in April 2017 as a means of slowing the growth of the private rental sector.
Before the Tenant Tax:
Before Section 24 was introduced, landlords were allowed to deduct their full mortgage interest payments, i.e. gain tax relief, before they paid tax on their rental properties. This incentivised landlordism because it enabled landlords to save sometimes thousands per year on their property tax.
After Tenant Tax was introduced in April 2017:
Now, after Section 24 has been introduced, interest costs on rental properties can only claim regular tax relief and are not fully deductible.
What Landlords Need to Know About Section 24
As a landlord, Section 24 damages your finances. In the years 2020/2021, landlords will only be able to claim a tax credit of up to 20% on their mortgage and loan interest. For some, this forces them into higher tax brackets, often resulting in the worst-case scenario of renting at a loss because their mortgage costs will end up being higher than the profits they turn from renting to tenants.
The Buy, Refurbish and Refinance strategy
If you buy a property and increase its value by refurbishing it or adding an extension such as a garage, you are then able to re-finance the property and gain a bigger mortgage, due to the fact that you have increased the property’s value as its owner. To let this property out, you, as the landlord, can then charge a higher price for rentals due to the property’s increased value, and can in turn increase your profit margin. Super, right?
However, under Section 24, the interest on your mortgage will increase. This means that, within the parameters of the Tenant Tax, you may have refurbished and refinanced the property to your own detriment, due to the fact that your tax bracket will now be higher – and with no interest tax deductions, you could face paying more than you can make from rentals.
If you are considering going down the buy, refurbish and refinance route, make sure you calculate this before you begin.
Should I set up a limited company?
Many landlords opt to set up a limited company from which to rent the property officially. This is because under Section 24, limited company landlords are not affected, and so can operate on a more lucrative platform than a private landlord. Like any transference of this nature, there are upsides and risks involved in doing so. Make sure to seek the advice of a property lawyer before making this change.
Nevertheless, transferring your existing properties into the limited company you have created is registered by law as a sale. This means that the costs incurred by making the “sale”, (i.e. transferring your assets under the name of your limited company) such as stamp duty, could cost more than operating under Section 24 as a private landlord.
Will Section 24 affect me?
Section 24 will NOT affect you if:
- You own your property or properties outright with no mortgage.
- You operate as a limited company landlord.
However, Section 24 WILL affect you if:
- You are a UK based landlord with one or more mortgaged rental properties (this includes properties outside the UK)
- You are a non-UK based landlord with one or more mortgaged properties in the UK
How much more tax will I be paying?
This entirely depends on a few different factors, including:
- Your tax bracket. If you are within the 40-45% tax bracket, you will pay more tax, although if you are in the 20% bracket, you will also pay high tax if your gross income is over £45,000.
- The loan-to-value ratio of your property.
If you are unsure about how much more tax you will pay under Section 24 than you did before, or you are new to landlordism, there are ways to calculate your tax using online calculators or by seeking financial advice. This will, once again, depend on your gross earnings, your property’s value, and your mortgage loan.
Can I transfer my properties to a lower-income spouse/partner
This is a viable option for landlords who earn more per year than their spouse, partner or family member who might pay low or no tax. This would lower the amount of tax payable on the rental income the property receives, helping you to turn a larger profit on your property overall.
However, transferring your assets to a lower-income person requires trust; technically, they own the property and can control it. Ensure that you have full trust and make sure to do this through a reputable property lawyer before proceeding.
What can I do to limit the effects on my profit?
There are a few things you can do to limit the effects of Section 24 on your profit. These include:
- 01. Seeking professional financial advice, in order to analyse your income, properties, tax brackets and other factors and see how you will be affected in future.
- 02. Consider other options, such as becoming a limited company or transferring the property ownership to a lower-income spouse or partner.
- 03. Cutting costs in other areas, to make up for lost profits under Section 24.
Speak to us about your tax options or transferring properties into a limited company
If you want to know more about transferring properties into a limited company, or you want to talk to a professional accountant about your tax options, do not hesitate to contact us today!