UK landlords likely to see big tax bill increases due to Section 24

Landlord Expert
By Landlord Expert July 18, 2017 10:08

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 was 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.

If you have any kind of loan or mortgage interest on your buy-to-let property, then you will be affected by these tax changes. 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 you do to limit the effects?

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

James Davis, CEO and founder of Upad, comments;

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.”

Landlord Expert
By Landlord Expert July 18, 2017 10:08

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