How Section 24 Affects Landlords with UK Residential Property
There has been a lot of debate and objections surrounding the Section 24 landlord tax change that came into force in April 2017. It is being considered as the biggest threat ever faced by landlords in the UK.
If you don’t know what Section 24 entails, read on and find out how this clause of the finance act can affect you and how you can prevent yourself from suffering a loss because of the subsequent tax changes.
Property Law is Changing
Section 24 could mean that more than half of the landlords with UK residential property will be paying higher taxes despite any increase in their income, and some might actually be renting the property at a loss.
Previously, the full cost of their loan interest payments on rental properties was deducted by the landlords before tax was paid. However, this isn’t the case anymore. With the Section 24, loan, overdraft and interest aren’t considered when taxable rental income is calculated.
The changes are phased gradually over a period of 4 years that started from April 6, 2017. From April 6, 2017, landlords could still claim tax relief, but only on the first 75 percent of their mortgage interest costs. The remaining 25 percent had the basic tax rate applied.
In the second phase that started from April 6, 2018, the tax relief that landlords could claim decreased to 50 percent. The basic tax rate is applied to the remaining 50 percent.
From April 6, 2019, the tax relief that can be claimed on the mortgage interest cost will drop to 25 percent. The basic rate will be applied to the remaining 75 percent.
By April 2020, tax reliefs for landlords will be eliminated. Due to these changes, landlords who have buy-to-let mortgage in the 40 percent to 45 percent tax brackets will have to pay more taxes while landlords who are in the 20 percent tax bracket may have to pay more if their rental plus other income is more than £45,000.
What Should Landlords Do?
Here are three (3) options landlord’s may choose, in order to help them minimise the loss from the Section 24 changes:
1. Corporation tax rate is 20 percent. Therefore, you could set up and sell the property into a limited company and have profits taxed at the 20 percent rate. However, before taking this option you may want to speak with your tax adviser on whether capital gains tax is to be paid upon selling the property as an individual landlord to the Limited company - no matter whether you are a 100% shareholder and sole director the business. With London Real Estate and UK property having increased in value over the years, chances are that you may have to pay if the property has appreciated and a profit is made on the sale. If you don’t have a tax adviser, contact us on + 44 (0) 207 993 4081 and by email info @ stonelinkinternational.com and we will refer you to our wealth and tax team to assist.
2. You could use the AVC pension scheme if you are close to or in the 40 percent tax bracket, to lower your tax liability. However, before taking this option you may want to speak with your Financial Advisor (IFA) on when you will be able to draw down on this amount of money. Chances are it may have to be at a much later stage in your life and ‘what if’ you need the money sooner?
It is very important to be prepared for what’s coming ahead, especially if you have a portfolio of four (4) or more properties. The new Prudential Regulation Authority (PRA), from September 2018, will demand that lenders assess a landlord’s full property portfolio before deciding which mortgage deal to offer, and they will be reviewing everyone. I will write an article explaining this new law by the PRA in July 2018.
If you don’t have a Financial Planner (IFA), contact us on + 44 (0) 207 993 4081 and by email info @ stonelinkinternational.com and we will refer you to our IFA team to assist.
3. Another option is to sell your property and invest in an EIS (Enterprise Investment Scheme) / SEIS (Seed Enterprise Investment Scheme) registered business that offers better tax reliefs. The team here at Stonelink International are on hand and happy to assist with the valuation and sale of the property, should you decide to take this option. Contact us on + 44 (0) 207 993 4081 and by email info @ stonelinkinternational.com and we will assist.
If you wish to invest in London and are worried about tax changes imposed by Section 24 or if you are a landlord and need more information and advice about how you could mitigate the impact of this legislation, contact us, London’s Real Estate Broker, for further assistance on + 44 (0) 207 993 4081 and by email info @ stonelinkinternational.com.