Section 24 – The Facts

Introduced in 2015, Section 24 of the Finance Bill that abolishes mortgage tax relief for buy-to-let landlords, will phase in over the next 4 years. What it means is that landlords will no longer be able to claim mortgage interest, or any other property finance, as tax deductible. Instead, rental profit will be taxed with a maximum deduction for finance costs of 20%, the basic tax rate, by 2021. The full name of the act is Section 24 of the Finance (no. 2) Act 2015.

Changes to tax deductible costs

Phase one
From April 6th 2017, the higher-rate tax relief can still be claimed on the first 75% of the mortgage interest costs (not on 100%. The remaining 25% will have the basic rate of tax relief applied.

Phase two
From April 6th 2018, the amount of tax relief a landlord can claim at the higher rates will drop to 50% of the mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.

Phase three

From April 6th 2019, the higher-rate tax relief can only be applied to a mere 25% of mortgage interest costs. The remaining 75% will be at the basic rate.

Phase four
By April 2021, landlords will only be able to claim tax relief at the very basic rate level of 20%.

The Background

Currently, landlords pay tax on profits they receive from renting their properties in the UK. The sum of tax paid depends on the profit made. Logical and simple. But not anymore.

In July 2015, George Osborne decided to curb the amount of tax relief landlords receive on buy-to-let mortgages. This means that a landlord will get taxed on profit and on the gross monthly income: on the full amount of rent received before mortgage interest is paid.

To help landlords adjust to losing such a massive tax off-set, this is being phased in over a period of 4 years, rather than all immediately.

How will Section 24 affect me?

If you have any kind of loan or mortgage interest on a buy to-let property or several buy-to-let properties in the UK you will be affected. If the loan or mortgages add up to a large proportion of your costs, you will now start to pay tax on those costs – as well as your profit. This will obviously impact heavily on the overall yields to be seen from these properties and in some cases, may even mean that some holdings are no longer able to make ends meet.

What can I do to limit the effects on my profit?

Plan ahead and seek advice from your solicitor, tax advisor, mortgage broker. There are ways to soften the blow but you need to be prepared and well informed.

Are there any other changes that might affect my profits?

Along with mortgage interest relief restriction, mortgage arrangement and broker fees will no longer be tax deductible. Previously, if a property was rented furnished, HMRC would allow you to offset 10% against your net income each year, regardless of whether you replaced any items. Now, this will only be allowed if you actually replace furniture like-for-like, so be wary of only replacing furniture if it’s absolutely necessary.

Once the safe bet for investing in UK property, thanks to Section 24 and further factors that will affect this sector, buy-to-let has suddenly become a far less attractive option. If you are considering selling your buy-to-let properties or were thinking of purchasing property for letting and are seeking an alternative investment opportunity, it’s time to consider structured property opportunities. Tipped by PWC as the sector to be involved in for UK property in 2018 and beyond they offer certainties that buy-to-let does not. Contact us today for more information.

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