What is Section 24?
The Section 24 tax changes restrict tax relief for finance costs secured by private landlords on residential properties to the basic rate of Income Tax.
The changes were initially announced in the Conservative government’s summer budget of 2015.
In order to give buy to let landlords time to adapt to the removal of finance costs as a tax-allowable expense, the changes have been phased in over 4 years since 6 April 2017.
Will Section 24 Impact my property business?
The good news for basic rate taxpayers is that if the changes do not make you a higher rate taxpayer, you will not lose out financially. This is because you will be paying income tax at 20% and receiving a tax credit at 20% on the finance costs – so no additional tax will be due.
If, however, you are already a higher rate taxpayer, then, unfortunately, each pound of interest you pay will attract at least an extra 20p in tax, landlords should take this into account when considering any property deals.
Whatever your current tax-payer status, it is important that you forecast what the changes will mean for you. It is not uncommon for landlords to go from being a basic rate taxpayer to an advanced rate taxpayer as a result of buying properties.
How will section 24 impact my cashflow?
There is concern that many landlords have not been quick enough to react to Section 24 and will face a cashflow crisis as a result of this. This is to do with how the UK tax system operates.
As you can see from the graph, 2022 is the worst year from a cashflow perspective. This is because it takes a while for the tax payments to catch up with the actual tax bills.
What counts as ‘Finance Costs’ in Section 24?
Finance costs include:
- Mortgage interest
- Interest on loans to buy furnishings
- Fees incurred when taking out or repaying mortgages or loans
Tax relief is not usually available for capital repayments of a mortgage or loan, and the tax credit only applies to the recently disallowed finance costs – and not capital repayments.
Why is the Section 24 Tax Credit a maximum of 20%?
It is a maximum because in some circumstances you could make money from the tax changes therefore there is legislation in place so that you cannot be ‘better off’.
For example, if 20% of your finance costs equalled £2000, but the tax changes actually only increased your tax bill by £1500, then you would stand to make £500 at the expense of HMRC and your fellow tax-payers if a £2000 tax credit was applied.
To prevent this, the legislation is in place so that you would instead receive just a £1500 tax credit in this example.
What is the impact of Section 24?
Buy to Let Landlords typically take out mortgages either on individual properties within their portfolio or across their portfolio as a whole. This usually enables them to buy more property or invest in improvements – Section 24 makes this more difficult.
Many landlords have also relied on capital growth to fund lifestyle expenses through re-mortgaging. Section 24 as well as changes to the Prudential Regulation Authority’s rules that portfolio landlords should now be treated as any other business.
As a result of the changes there is early evidence that the private rented sector is running with a smaller number of landlords, with some landlords leaving the market and others taking advantage of the available opportunities to increase their portfolio.
Does Section 24 affect Companies?
Limited companies holding residential property are currently still able to claim finance costs as an allowable expense. Sole Traders and Partnerships, including Limited Liability Partnerships (LLPs) however are all impacted by the Section 24 tax changes.
In some circumstances a Limited Liability Partnership can be connected with a Limited Company with the net result being that the interest is effectively deductible. This type of business planning is commonly referred to as a Hybrid Business Structure or Mixed Partnership LLP and can enable property owners to maximise the commercial benefits.
Why does Section 24 exist?
The Government Claimed:
- Buy-To-Let (BTL) investors got an unfair advantage of financial assistance over owner occupiers for their mortgage.
- The new rules would make more homes available for residential buyers, especially first time buyers.
- Reforming mortgage tax relief on BTL mortgages would dampen speculation in the housing sector.
- The Bank Of England they were concerned house prices were to fall and that landlords selling properties could encourage the decline further.
- The Government wanted to professionalise the industry
How might Section 24 be hurting your Property Business?
Section 24 can impact you and your property business in many adverse ways. Here are just some examples:
- Your profits have been inflated
- You’ve been pushed into a higher rate tax bracket
- You’ve had a much larger tax bill
- You know your tax bills are increasing each year and you don’t know how to plan for them, so you have heightened uncertainty in your business
- It’s impacting on your cash flow
- Your plans to grow your property portfolio have had to go on hold
- You’ve had to sell a property to pay your tax bill
- Your retirement plans are at risk
- You’re spending more time doing things yourself simply to save money
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