Alan Hawkins

What is section 24, also known as the 'Tenant Tax'

What is section 24, also known as the 'Tenant Tax'

You’ve probably been wondering recently, why is everyone talking about mortgage interest relief?   Isn’t it just another tax change that won’t really make much difference to me?  For some (those that own property outright with no mortgage), this change will not make a difference to the way they run their buy-to-lets. But for other landlords, you are likely to see a big rise in your tax bill and a big hit to your profits. Those who are in the higher rate tax bracket of 40% will be hit hardest.


Section 24 was introduced in April 2017 and will phase in over the next 4 years. What it means is that you 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, also known as the Tenant Tax because of the legal case launched to challenge the act.


Will Section 24 actually affect me?

 If you have any kind of loan or mortgage interest on your buy to-let property, then yes. If it is a large proportion of your costs, you will now start to pay tax on those costs - as well as your
profit. Landlords shouldn’t be burying their heads in the sand and assuming these changes will not affect them. We strongly advise assessing your buy-to-let finances or contact a tax specialist for advice.
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What can I do to limit the effects on my profit?

First thig is forward planning! Speak to an accountant or a tax expert who can explain how much higher your tax bill will be and if there is any way to minimize it. A few options include transferring property ownership into a spouse or partner’s name if they are in a lower tax threshold, setting up a company to own your buy-to-let properties and looking at your accounts to see where you can cut costs.


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. From April 2016, the wear and tear allowance for all landlords was
scrapped. 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 necessary.


Changes to tax deductible costs

 Stage one
From April 6th 2017, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.

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

Stage three

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

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


For landlords that are affected by the tax changes but yet to do anything about, there is still time to look at ways of reducing your costs and increasing your revenue.

There are clever ways in which you can ‘spring clean’ your rental portfolio to improve it. If you haven’t already, you should book a consultation with an independent financial advisor or tax specialist. They will be able to advise you on whether you need to sell off some low-yielding property, reduce some of your mortgage payments or change the ownership of your portfolio to protect the profitability of your business. Options include setting up a company to buy property or if you already own a rental property as a private individual, you could transfer it to a limited company, however, you might then be required to pay capital gains tax on the difference between the original purchase price and its current value and pay stamp duty.
If you’re a higher rate or additional rate tax payer, or these changes risk tipping you into the higher tax bracket, and you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill, however, be prepared, as changing the split could have implications on other taxes, such as capital gains tax and inheritance tax, so you should take advice beforehand.

Higher tax will mean lower profits for many landlords, which is why some are warning that rents will have to rise this year. However, rent rises are likely to be deeply unpopular with tenants so you should think about adding some cost-effective, tax deductible improvements to your properties that justify asking for an increase.


 “The government has persistently targeted landlords with tax changes and more red tape over recent years. Rental yields continue to be stressed with tax changes over the years. Section 24 FA 2015 now found within tax legislation at Section 272A Income Tax (Trading and Other Income) Act “ITTOIA” 2005 provides for the mortgage interest restriction to take effect over the course of 3 years commencing 6 April 2017 with the full effect taking place on 6 April 2020, so the law already provides for the changes to take place.
There is a serious possibility of landlords with highly geared portfolios, finding themselves in a position of having to pay tax in situations where they have not even made a real profit, i.e. a 40%/45% taxpayer receiving £10,000 of rental income and paying £10,000 in mortgage interest thus making no real profit, will find themselves paying £2,000/£2,500 in tax (2020/21).

We advise all landlords not to bury their head in the sand, the law has been written and we know what is coming unless there is a major change in government policy


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