Landlord Guide Section 24 Guide 1
What is Section 24? You ve probably been wondering recently, why is everyone talking about mortgage interest relief? Isn t it just another tax change that won t really make much difference to me? For some (those that own property outright with no mortgage), this change will not make a difference to the way they run their buy-to-lets. But for other landlords, you are likely to see a big rise in your tax bill and a big hit to your profits. Those who are in the higher rate tax bracket of 40% will be hit hardest. Section 24 is being introduced from April 2017 and will phase in over 4 years. What it means is that you will no longer be able to claim mortgage interest, or any other property finance, as tax deductible. Instead, rental profit will be taxed with a maximum deduction for finance costs of 20%, the basic tax rate, by 2021. The full name of the act is Section 24 of the Finance (no. 2) Act 2015, also known as the Tenant Tax because of the legal case launched to challenge the act. Essentially, buy-to-let finance costs will no longer be accounted for when working out your taxable profits. 3
Will Section 24 actually affect me? If you have any kind of loan or mortgage interest on your buyto-let property, then yes. If it is a large proportion of your costs, you will now start to pay tax on those costs - as well as your profit. Landlords shouldn t be burying their heads in the sand and assuming these changes will not affect them. We strongly advise assessing your buy-to-let finances or contact a tax specialist for advice. What can I do to limit the effects on my profit? First, forward planning. Speak to an accountant who can explain how much higher your tax bill will be and if there is any way to minimize it. A few options include transferring property ownership into a spouse or partner s name if they are in a lower tax threshold, setting up a company to own your buy-to-let properties and looking at your accounts to see where you can cut costs. After mortgage and finance costs, a big expense is letting agent fees. Consider becoming a self-managing landlord and you can save 1000 s. Upad offer fixed up-front fees to advertise your property where tenants are looking, and can handle all the paperwork for you and arrange for legal documentation such as gas safety certificates and EPC s. Ask yourself, is your letting agent doing enough to justify their percentage fee? Are there any other changes that might affect my profits? Along with mortgage interest relief restriction, mortgage arrangement and broker fees will no longer be tax deductible. From April 2016, the wear and tear allowance for all landlords was scrapped. Previously, if a property was rented furnished, HMRC would allow you to offset 10% against your net income each year, regardless of whether you replaced any items. Now, this will only be allowed if you actually replace furniture like-for-like, so be wary of only replacing furniture if it s necessary. 4 5
Changes to tax deductible costs From 2016, the Government has begun reducing the number of tax-deductible costs incurred by landlords. The table below shows tax-deductible costs before and after the changes. Costs Mortgage interest Loans associated with property Broker fees Advertising / letting agent costs Before (2016) After (2021) Stage one From April 6th 2017, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied. Stage two From April 6th 2018, the amount of tax relief you can claim at the higher rates will drop to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied. Stage three From April 6th 2019, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate. Stage four By April 2021, you will only be able to claim tax relief at the basic rate level of 20%. Wear and tear allowance General running costs Click here to find out how much extra tax you will be likely to pay after April 2017 with our free online calculator. https://info.upad.co.uk/new-budget-calculator 6 7
James Davis Upad CEO James Davis shares his comments on Section 24, as a portfolio landlord, industry voice and founder of Upad, the UK s largest online letting agent. For landlords that are affected by the tax changes but yet to do anything about, there is still time to look at ways of reducing your costs and increasing your revenue. There are clever ways in which you can spring clean your rental portfolio to improve it. If you haven t already, you should book a consultation with an independent financial advisor or tax specialist. They will be able to advise you on whether you need to sell off some low-yielding property, reduce some of your mortgage payments or change the ownership of your portfolio to protect the profitability of your business. Options include setting up a company to buy property or if you already own a rental property as a private individual, you could transfer it to a limited company. However, you might then be required to pay capital gains tax on the difference between the original purchase price and its current value. If you re a higher rate or additional rate tax payer, or these changes risk tipping you into the higher tax bracket, and you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill. However, be prepared, as changing the split could have implications on other taxes, such as capital gains tax and inheritance tax, so you should take advice beforehand. Higher tax will mean lower profits for many landlords, which is why some are warning that rents will have to rise this year. However, rent rises are likely to be deeply unpopular with tenants so you should think about adding some cost-effective, tax deductible improvements to your properties that justify asking for an increase. You should also look at ways to negotiate with your letting agent and be vigilant to agents trying to increase their commission or other fees, as they look to flesh out their profits following the ban on tenancy fees. Find an agent who is prepared to negotiate favourable terms. You can minimise the impact of the upcoming tax changes through saving money spent on advertising and tenancy set-up by using an online letting agent like ourselves. Vanessa Warwick Vanessa Warwick is a portfolio landlord and runs Property Tribes along with her husband Nick Tadd. Since its launch in 2009, Property Tribes has become one of the busiest and most influential independent sites for landlords and property professionals in the UK. I believe that Section 24 is the biggest threat that the private rented sector has ever had to face. Of particular concern to me is the fact that small landlords defined as owning 3 or fewer properties which make up 97% of the 2 million landlords in the UK, 8 9
do not even have this on their radar. The lack of awareness amongst the wider landlord community and indeed the lettings community is alarming to say the least. S24 is a ticking time bomb. I believe that the vast majority of landlords are unaware of the impending threat and will only become aware of S24 when they put in their 2017 tax return. By then it will be too late. Landlords need to be planning to mitigate the effects of S24 now! At PropertyTribes.com, we are already hearing of significant numbers of landlords selling up, talking about raising rents, or even fearing being forced into bankruptcy. Many of these landlords got involved in property investment as a pension hedge, and now the rug has been pulled out from underneath them. They wanted to provide for their own retirement, but now, ironically, those that are forced to sell up or go bankrupt will become a burden on the tax payer! Section 24 is the most thoughtless and destructive piece of legislation ever applied to the private rented sector and the consequences of it will be far reaching. Ultimately, it will be tenants who will be affected if landlords exit, go bankrupt, or put up rents to cover their increased costs. This tax is the first that unites landlords and tenants as both being equally affected. Hopefully, tenants who find out that they have to leave their home because their landlord is being put out of business by S24, will also join the political lobbying being organised by the Tenant Tax campaign. For many years, landlords were actively encouraged to provide accommodation as successive Governments failed to build enough homes or provide social housing. Like us or loathe us, landlords have provided a solution with over 80% of tenants being happy with the service provided by private landlords. Using a draconian retrospective tax regime is not going to help the situation, only exacerbates it. If the private residential landlord becomes an endangered species due to S24, it will ultimately be tenants who are most affected. The private rental sector provides choice to tenants, and landlords play a vital role in providing accommodation now that social housing is in massive decline and council waiting lists are increasing. If the private residential landlord becomes an endangered species due to S24, it will ultimately be tenants who are most affected. They will find that they have less choice of properties to live in, and rents rising dramatically due to scarcity of stock for let. This will ironically make it even harder for them to save for a deposit for their own home. Nobody should want this damaging scenario to be allowed to unfold because it will be like injecting steroids into what is already a housing crisis. 10 11
upad.co.uk 0333 240 1220 Martina Lees I believe that Section 24 is the biggest threat that the private rented sector has ever had to face. Martina Lees is a property journalist who primarily writes for the Sunday Times. Martina and her husband Daniel Lees are authors of The Accidental Landlord, which gives practical advice on entering the world of buy-to-let investment. Many of Britain s 500,000 or so accidental landlords who let out their home through circumstance, not because they bought it as an intentional buy-to-let investment still don t know that tax changes phased in from this month could wipe out their rental profits. By 2020, when the rules take full effect, especially those who own in London and the South East could find themselves subsidising their property every month. Work out now how it will hit your earnings, think long and hard about your goals and then act with expert advice. Don t rush into transferring your property into a limited company that could mean a much bigger tax hit. Instead, you could re-mortgage on a lower rate; raise rents and fire your agent; refurbish and deduct costs from your tax; or turn your property into a holiday let, which is exempt. Some should sell up. Others could simply restructure their finances by, for example, transferring ownership to their lower-earning spouse. The right answer will very much depend on your circumstances. 12 13
upad.co.uk 0333 240 1220 Raj Jiwani Raj Jiwani is a director at Charterhouse, a chartered accountancy and tax firm. Raj is a Chartered Tax Advisor with a wide range of experience spanning corporate tax and personal tax planning. Raj is now in charge of the tax department and provides advice to a varied portfolio of clients. The government has persistently targeted landlords with tax changes and more red tape over recent years. Rental yields continue to be stressed with tax changes over the years. Section 24 FA 2015 now found within tax legislation at Section 272A Income Tax (Trading and Other Income) Act ITTOIA 2005 provides for the mortgage interest restriction to take effect over the course of 3 years commencing 6 April 2017 with the full effect taking place on 6 April 2020, so the law already provides for the changes to take place. There is a serious possibility of landlords with highly geared portfolios, finding themselves in a position of having to pay tax in situations where they have not even made a real profit, i.e. a 40%/45% taxpayer receiving 10,000 of rental income and paying 10,000 in mortgage interest thus making no real profit, will find themselves paying 2,000/ 2,500 in tax (2020/21). We advise all clients not to bury their head in the sand, the law has been written and we know what is coming unless there is a major change in government policy. You need to consider whether the 1.75 million UK landlords are a bigger vote winner than the Many landlords still don t know that tax changes phased in from this month could wipe out their rental profits. UK tenant population aspiring for the British dream of becoming homeowners? We have been advising landlords of the effect that the Section 24 changes will have on their property businesses for a number of years now and also of ways in which they could mitigate the effect, this advice has resulted in most of these landlords restructuring their businesses. 14 15
E: help@upad.co.uk T: 0333 240 1220