Section 24 and the impact it will have on landlords

What is changing in property law?

Section 24 of the Finance (no. 2) Act 2015 might mean that over half of UK landlords will be pushed into a higher rate of tax despite their income not having increased, and some might end up renting at a loss.

Until now, landlords have been able to deduct the full cost of their mortgage interest payments on their rental properties before they pay tax. Starting April 2017, mortgage, loan and overdraft interest costs will not be considered in calculating taxable rental income.

The changes will be phased in gradually over 4 years, starting from 5th April 2017. By 2020, 100% of finance costs will be restricted to 20% tax relief only.

The change will be introduced gradually over the next 4 years and could see many landlords with interest costs affected and end up paying more tax on their property income. In addition, landlords could be pushed into higher tax brackets which in turn could affect child tax credit assessments and student loan repayments, leaving landlords even more out of pocket.

Section 24 applies to:
•UK resident landlords with residential rental properties anywhere in the world
•Non-UK resident landlords with UK based residential rental properties
•Trusts and partnerships with residential rental properties

Who is affected?

Landlords with high loan to value rental portfolios will be the most affected;

Landlords with buy to let mortgages in the 40%-45% tax brackets will pay more tax;

Those in the 20% bracket may pay more if their gross income (rental and other income) is greater than £45k, which in turn could affect child tax credits you receive and student loan repayments.

What can landlords do?

There are a number of courses of action* that could help some landlords mitigate the new legislation.

•You can increase rent, but you might price your property out of the market if it is in low demand areas.
•You could transfer rental property into a limited company, which will see your profits taxed at 20%. There are however many complex reporting issues, such as preparation of annual accounts to be submitted to Companies House and other taxes that may apply including PAYE, NIC and the recent changes to the taxation of dividends.
•You can Increase mortgage repayments to cut down the amount of interest payments in the long term if the mortgage is capital and interest.
•If you are married or in a civil partnership and have joint ownership, you can make a declaration of beneficial interest of joint property on HMRC Form 17 to change the split of how the income is taxed from 50/50 to the actual ownership ratio which could be more tax efficient.
•If you are close to the 40% tax band, then there is the possibility of using AVC pension schemes to help reduce your tax liability.

Each landlord’s situation is unique and you should seek professional tax advice before implementing any measures.