Section 24 “Anti Landlord Tax”
Received a higher-than-expected tax bill this year?
In the summer budget of 2015, George Osborne announced that from 6 April 2016 a scheme known as Section 24 was to be introduced that meant that landlords who own properties in their own name were no longer able to offset their mortgage interest against their rental income. The thinking behind this scheme was that home owners could not offset their mortgage interest before paying tax, so landlords should not be able to either. The scheme is to be introduced over four years meaning in tax year 2017/18 25% of mortgage interest would be liable to tax, 2018/19 it will be 50%, 2019/20 it will be 75% and by 2020/21 it will be fully implemented at 100%.
This tax, otherwise known as the “anti-landlord tax” only applies to landlords who own buy to let property in their own name as opposed to those who own portfolios in Ltd companies. Many might think that professional landlords will not be affected because they would be holding property in a Ltd company, but unfortunately this is not the case because the advice given to landlords for many years by their professional advisors was to buy property in their own name as it was, at the time, the most tax efficient approach and therefore correct.
Many landlords are blissfully unaware of the introduction of the anti-landlord tax, although some are starting to feel the impact with tax bills resulting from their tax returns submitted in January 2018; they are beginning to experience loss of profits, even though it is only 25% implemented.
The very worrying thing about this is that many landlords who are currently lower rate tax payers will be pushed up into the higher rate tax bracket, and may be in a position where they will be losing money on their investment properties. This is because the tax due could work out more than the profit they make. The National Landlords Association predict that this could happen to tens of thousands of people.
What makes the scenario even scarier is the fact that many landlords who will be affected do not know this is coming because a lot of them have not been warned by their accountants or they don’t actually use an accountant relying instead on self-assessment; they will only know when they start getting massively increased tax bills.
Will Section 24 affect you?
If you already own Buy to Let (BTL) or Houses of Multiple Occupation (HMOs) in a Ltd company then you will not be affected.
However, if you own BTL or HMOs in your own name and have mortgages on them you will be affected and you need to educate and prepare yourself.
The greatest impact is going to be on landlords who are highly leveraged, those who are already higher rate tax payers, and lower rate tax payers who will be pushed up into the higher rate tax bracket by Section 24. It will also be affecting things such as child tax credits and student loans as an individual’s income level appears higher than it once did.
Let us illustrate how this may affect a typical landlord:
Noel is a landlord with two properties that each bring in a rent of £1,100 per month or £26,400 per year. The mortgage interest he pays on the properties is £850 each a month or a total of £20,400 a year between them. This makes Noel a relatively highly leveraged Buy to Let landlord. He also earns a salary of £35,000 a year from his job.
The following shows how Noel will be affected:
You can see from the two highlighted figures that pre-Section 24 he earns a net profit after tax of £4,800, however, once Section 24 is fully implemented he earns less than half of the previous profit, just £1,960. You can see here how seriously some landlords will be affected.
Want to see how Section 24 will affect you?
The Telegraph* have a calculator which landlords can use to see how they will be affected which can be found below.
? Click here to see how Section 24 will affect you
Concerned, or even shocked at the results?
So, what are the options?
Are Ltd companies the solution?
Because tax on property owned within a Ltd company will still be calculated after offsetting finance costs, many landlords are considering incorporating and moving properties owned in their own names to a Ltd company. However, this scenario could mean that landlords end up paying stamp duty and capital gains tax which is likely to be more than the additional tax.
There is some debate about whether landlords in this situation can claim incorporation relief where they will not have to pay stamp duty and capital gains tax. However, the best advice here is to seek advice from a qualified accountant, preferably one who specialises in property.
Anyone considering incorporating also needs to consider additional the accountancy costs associated with running a Ltd company, and the fact that Ltd companies often pay higher mortgage interest rates It is worth investigating but it may not be a perfect solution to avoid Section 24.
What other options are there?
Another option some landlords are taking is to literally sell up. Some are going to raise the rent to meet their costs or spend less money on maintaining their properties, both options that could dramatically affect the housing market and those who rent property.
Hano Property Ltd can offer another solution
There is another category other than property owned in a Ltd company which will not be affected by Section 24, and this is any property used as serviced accommodation where the agreement between the landlord and management company is correctly set up. **
And this is what Hano Property Ltd specialise in and can help you with. When you let us manage your property for use as serviced accommodation, we can structure a management contract deal where you may still be able to offset your mortgage interest against your income. This is because property used as serviced accommodation is exempt from these changes as it is classed as a furnished holiday let. **
Entrusting your property to us also comes with a host of other benefits which you can read about here.
We are actively seeking all types of property, including those used traditionally as buy to lets for use as serviced accommodation.
Interested? Please contact us to see how we may be able to help you.
* Hano Property Ltd hold no responsibility for the content of external websites. ** We strongly advise you consult a qualified accountant who specialises in property and seek independent advice prior to entering an agreement with Hano Property Ltd.