What is the Section 24 tax relief change?
In 2015 the Government made an announcement: Landlords who were high-rate or additional-rate taxpayers would no longer be able to deduct mortgage interest from their rental income and could only secure relief on the interest at the basic tax rate rather than the higher level they had enjoyed up to this point.
Many landlords are now facing up to the reality of increased tax bills, with the reality that potential changes will create issues for basic-rate taxpayers too in the future.
When does this take effect from?
Although this was implemented on 6th April 2017, the loss of relief will not disappear automatically. Relevant tax returns can be submitted any time between then and 31st January 2019, so there is a few years until the force of the changes will be fully felt by the concerned.
How this might affect individual landlords can be seen below with the disallowed costs and their corresponding dates:
- 25% - 2017 to 2018
- 50% - 2018 to 2019
- 75% - 2019 to 2020
- 100% - 2020 to 2021
Who will this affect?
Landlords who were high-rate or additional-rate taxpayers (i.e. 40% tax bracket) would no longer be able to deduct mortgage interest from their rental income and could only secure relief on the interest at the basic tax rate rather than the higher level they had enjoyed up to this point.
This applies to landlords who own personal property as well as those letting property in a partnership, but they have yet to be applied to furnished holiday lets or properties held in a company.
Are there any other effects?
Sadly, yes. These may be:
- Losing your personal tax allowance
- Losing child benefits
- It could also effect child support payments
Who will this not affect?
Landlords who own their properties outright or landlords on the 20% tax rate will not see any difference in their tax bills. Also, landlords whose mortgage payment is mostly loan repayment (rather than interest) will only be slightly affected.
This can be established by looking at a mortgage statement. The interest is shown separately to the actual loan repayment as demonstrated in the diagram. The actual loan repayment has never been tax deductible.
What can you do to be as tax efficient as possible?
By looking at the last year of property accounts, a tax expert will be able to confirm if a landlord will be affected and by how much. You would then be able to look at mitigation and strategic planning to minimize the effects of these tax changes whilst looking at succession planning to provide the right solution for each client.
What options may be available to me?
- Creating partnerships
- Using spouse's tax allocation where they earn less than £45,000 per year
- Creating trusts
- Personal pension scheme
- Add limited company formations
- Reviewing your exit strategies
- Capital gains planning
What are the benefits of the above?
- Companies are exempt from restrictions on finance cost relief
- Incorporation can limit or remove capital gains
- Partnerships can enable you to utilise nil-rate tax payers and basic-rate tax payers
- Making your exit strategy as tax efficient as possible
What should you do?
- Speak to a professional about tax planning and your personal strategy - we can help you with this
- Consider all your options and implications, and act promptly in line with this
- Consider rent increases based on your own personal property/ properties to minimise the impact