Section 24 of income tax act for UK landlords: further details of the implementation

Government is gradually phasing out the 100 percent tax relief on mortgage interest and other finance costs that landlords previously enjoyed.
What’s changing?

Between April 2017 and April 2020, the 100 percent tax relief on mortgage interest will fall to 75 percent, then 50 percent, then 25 percent and finally zero. When the relief hits zero, it will be replaced with a 20 percent tax credit that is applied to the taxable profits that landlords make on their properties.

The UK Government has released further details of the implementation of Section 24 of income tax act.

Section 24 is gradually phasing out the 100 per cent tax relief on mortgage interest and other finance costs that landlords previously enjoyed.

What’s changing?

Between April 2017 and April 2020, the 100 per cent tax relief on mortgage interest will fall to 75 per cent. Then it will be 50 per cent, then 25 per cent and finally zero. When the relief hits zero, it will be replaced with a 20 per cent tax credit that is applied to the taxable profits that landlords make on their properties. (Read more: What are the common landlord pitfalls?)

Who will it affect?

  • Landlords who are in the higher and additional rate tax brackets
  • because they are in employment,
  • have a very profitable property business
  • or earn income from other sources,

All these will suffer the most as it is the end of their 40-45% tax relief.

Basic taxpayers may also be affected: as those with income close to the threshold, could find that they have been dragged into the higher-rate tax bracket as a result.

Landlords who are likely to get the biggest surprise, however, are those who have no knowledge at all of the changes that came in with Section 24 of the Finance Act 2015 as many landlords were unaware of Section 24 and what it would mean for their rental profits.

Many buy-to-let landlords have heavy costs and these changes mean they will be at a loss every month. (Read more: Unexpected costs of being a landlord)

What are some landlords doing reduce the effects?

Some landlords are selling their properties with the lowest yields as part of a strategy to reduce their losses. Many landlords are looking to the opportunity to reduce their property portfolio throughout 2018. (Read more: Section 21 and section 8 notices)

Setting up a company to reduce the impact

One way landlords can potentially reduce the impact of the Section 24 clauses is by setting up a company and transferring the ownership of their properties to the company.

Transferring property interests into a limited company could be a way for landlords to ease their tax burden because it is not so straightforward for them to draw capital from the company in the future. It also comes with the burden of more reporting paperwork, such as the preparation of annual accounts.

The reality is that it is still early days in terms of assessing the impact of the Section 24 changes on landlords’ behaviour and the rental market generally. (Read more:  How to ensure buy to let success?)

What’s the future view?

The average buy-to-let property would be £850 per year less profitable once the Section 24 policy is fully implemented. Landlords will claw back 50 per cent of that loss through rent rises. There could be an increase in the rents of seven per cent nationally over four years – the equivalent of £250 a year. The report also estimates that buy-to-let-backed private-rented-sector stock could fall by 46,000 properties by 2020/21. Landlords would be leveraged by almost £8bn. Ultimately, it might not be landlords who get the biggest shock from Section 24, but the UK economy as a whole.

What is West London Property Networking

Please contact Pelin Martin to book a 30-minute free property consultation on +0208 994 7327 – pm@bluecrystallondon.co.uk

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