The effects of Section 24 & updates for the new tax year
The legislation in Section 24 of the Finance Act 2015 was one of the biggest challenges landlords have had to face in modern times.
Known as the ‘Tenant Tax’, it has cost many rental property owners thousands of pounds.
But what is it, and how does it work?
Section 24 removes a landlord’s right to deduct finance costs, including mortgage interest and arrangement fees, from their rental income before calculating their profit from rental income.
The landlord can then claim back a tax credit equivalent to 20% of annual mortgage interest.
This means landlords have to pay tax on the gross income they earn from a rental property. This can often lead to landlords entering a higher tax bracket and cause further costs with repayment of Child Benefits and Student Loans, as well as a higher tax charge as the interest relief, is given as a flat 20% deduction on the overall tax bill.
Here is an example of how a landlord will be affected.
Bob earns £48,000.
He has two children and receives Child Benefit
He owns 1 rental property – which generates rental income of £12,000 after costs and incurs £12,000 of interest.
|Under the old rules||Under the new rules (S24)|
|Less mortgage interest old rules||-£12,000||£0|
|Tax due at 20%||£7,086||£7,540|
|Tax due at 40%||£0||£3,892|
|Child benefit repayment||£0||£1,885|
|Less finance relief new rules||£0||-£2,400|
|Total tax due||£7,086||£10,917|
As we can see this is one property – and even if we assume that most landlords are already repaying Child Benefit – then the tax due still leaps up.
Landlords have long been a target of successive governments and often the costs of transferring property to a limited company can be prohibitive – it becomes more and more important to ensure refinancing models and taxation projections are looked at to ensure the property ownership still makes sense and what options are available.
If you would like to read more about the Section 24 petition then click here.
There are also several updates that come in from the new tax year.
The Corporation Tax rate has risen to 25%. This is not an all-or-nothing situation as there is a starting rate of 19% and a marginal rate of 26.25%. If you earn up to £50,000 in profits is taxed at 19%, between £50,001 and £250,000 is taxed at 26.25% and once a company makes £250,000 all of its profits will be taxed at 25%.
It is worth noting these allowances are reduced where there are connected companies – for example, 2 connected companies and the starting rate halves to £25,000 for example in each company.
Capital gains tax
From the 6th of April 2023, the Capital gains tax threshold will decrease to £6000. An example of how this will affect a landlord is if they sell one of their buy-to-let properties from this date then the level they start to pay capital gains tax on their profit will be from £6000 instead of £12,300.
In the worst case scenario this will cost an additional £6,300 x 28%(higher rate on residential CGT) - £1,764 extra CGT.
Here are a few things to be aware of with this upcoming change...
The relevant tax will have to be paid within 30 days of completion of a sale rather than the current 31 January deadline.
Ensure you can accurately calculate your Capital Gains Tax by keeping a record of all your rental income and expenses.
Ensure you are balancing the impact of recent market conditions with the increased demand for rental properties. As potential buyers pause their plans due to the mortgage instability, investing in property continues to be a sensible choice with an average 6.4% annual increase in property prices over the last 10 years.
From April 2023, second homeowners will have to prove holiday lets are being rented out for at least 70 days a year to access small business rates relief, where they meet the criteria..
If you are in need of more advice, contact our team at your local branch, who will be happy to help.
Robert Bowden, property tax expert, specialising in developers and investors in the property sector.