In the budget of 2015 George Osbourne unveiled a shock tax change that will seriously affect, perhaps even wipe out, many landlords. It is officially known as Section 24 of the Finance (no. 2) Act 2015: and we all need to know about it, not only so we can prepare ourselves but also so that we can fight against it.
It is important to write about this now because this tax begins to be phased in this year.
Section 24 – What is it exactly & how will it affect you?
Section 24 removes landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect we will be taxed on our turnover rather than our profit, meaning that tax will be payable on non existent income.
For some tax rates will exceed 100%, landlords will have to pay all of their profit in tax and then pay more tax still. It is due to be phased in this year (2017) and fully implemented by 2020.
Section 24 will mean that most landlords will have to pay extra tax of 20% or more of their annual mortgage interest and other finance costs. The tax they pay may be greater than their real profit, leaving them with a rental loss and a cash shortfall.
Smith & Williamson (London based investment, accountancy and tax services company) have made some calculations on Section 24.
Any higher rate tax payer (HRT) whose mortgage interest is 75% or more of their rental income, net of all other expenses, will see all of their returns wiped out by 2020.
Meaning that for all HRT payers mortgage costs above 75% of rental income will mean BTL investments become loss making.
For additional rate tax payers (45%), all returns are wiped out by the tax when mortgage costs reach 68pc of rental income.
If you are a current basic rate tax payer you may be affected because the figures could push you into a higher rate tax bracket.
Very wealthy landlords with no mortgages will not be affected by Section 24.
The Telegraph has developed a quick calculator so you can do your sums and see how Section 24 will affect you, click on the link to access it.
Further tools to do your calculations are given below too, so continue reading for them!
Section 24 – arrrrrrrgghhhhhh!
Ok so the alarm bells might be ringing, I know they are for me.
Section 24 is bad news for landlords with mortgages. Before the Summer 2015 budget it was unthinkable that the Government would charge anybody more tax than they are making profit but that is exactly what will happen under Section 24.
Landlords who are pushed up into higher rates of tax may subsequently lose tax credits and personal tax allowances. Some landlords may decide to sell and invest money in other ventures.
Some landlords may not be aware of Section 24 and suddenly find themselves with enormous tax bills that they do not have the means to pay, leading to repossessions. This in turn could lead to a property price crash if a surge of stock hits the market.
It is also bad news for tenants, rents will have to go up to help landlords cover these exorbitant costs and as mentioned above Section 24 may lead to increased repossessions.
Section 24 – What can we do about it?
When the budget was announced a group of landlords got together immediately to fight this tax. Initially they went to the courts to fight this under a Judicial Review, this was led by Cherie Booth QC but unfortunately failed. You can read more about that case here.
Now the group of landlords, led by Steve Bolton and Chris Cooper, under the brand of Tenant Tax continue to fight Section 24. They are lobbying in Parliament and engaging with leading industry experts to influence the Government to change their plans.
Their message to the Government is “NEW TAX RULES FOR NEW DEBT ONLY”.
That makes sense right, lay out the new rules so that those entering into buy to let mortgage agreements can factor that into their business planning.
Section 24 changes the rules that all landlords built their business models on, you can’t change the rules mid way through the game? Oh it’s the Government and we are just the people, they can do as they please.
I really recommend you spend some time looking at the Tenant Tax website, make a donation to the cause and look at the material provided. They have some hard hitting comments from professionals, such as;
Nicholas Hopkin, Senior Retired Partner at PwC,
Section 24 contravenes the Generally Accepted Accounting Principles (GAAP) that HMRC will continue to use for every other enterprise in the country
Lord Howard Flight, former Shadow Chief Secretary to the Treasury
The Government’s buy-to-let tax changes could destabilise Britain’s housing market by triggering a sharp fall in prices, if not a crash
HOWEVER, we can stand up and fight this. I have included here a spreadsheet that has been prepared by the Tenant tax team. Download it and have a look at the examples and then you can do your own Section 24 Calculations
By using the tools that the Tenant Tax team have put together, we can then contact our MPs and show them our figures. If you are not confident with spreadsheets or your tax returns please ask your accountant to complete it for you. If you have other professional advisers such as a mortgage broker, a solicitor or a letting agent then show the results to them too.
By showing our MPs how this will affect our property businesses and together we can try with all of our might to get the Clause 24 tax changed to “new tax rules for new debt only”.
Section 24 – Summary
I hope this article has helped you understand what Section 24 is and what it means for our industry. I hope also it has shown you that you can take action, we do not have to take this lieing down, we have a chance through supporting the Tenant Tax cause and by contacting our own MP to make a difference and demand the government reconsider their position on this tax.
I will continue to post under this article as any updates to Section 24 come through to me.
Section 24 – Update July 2017
We are now in the Financial Year where these tax regime changes are being implemented – are you aware, start planning now.
I wanted to remind you of the phased reduction of mortgage interest relief that is now live in this financial year April 2017 – April 2018
- 2017/18 – 75% allowed as a tax deduction; 25% subject to basic rate reduction
- 2018/19 – 50% allowed as a tax deduction; 50% subject to basic rate reduction
- 2019/20 – 25% allowed as a tax deduction; 75% subject to basic rate reduction
- 2020/21 – 0% allowed as a tax deduction; 100% subject to basic rate reduction
If you have not already started planning your strategy for these tax changes then you are not too late to do so. Some landlords will be faced with making a loss by 2020 and may want to look at the likely capital growth of a portfolio and chose to subsidise your investments for a time.
You may want to consider the costs and benefits of selling or incorporating some of your portfolio. Landlords who hold properties in a company will not be affected by the new regime.
Whatever your situation I urge you to talk to your accountant about how this will affect you so you are prepared, unfortunately this is not going away.
Section 24 – Tell me what you plan to do
With our portfolio, we plan to pay off as much of the debt on our non fixed term mortgages as possible. We have other commercial loans that finance a group of properties under one umbrella, these are fixed for a further 18 years. We plan to talk to our lender about converting these into a limited company loan.
Many landlords will have a plan, maybe you are incorporating into a limited company or have decided to sell some of your poorer performing properties. It would be great to hear what your plan is.