As a landlord, you may be about to feel the full force of the fourth and final stage of Section 24 – AKA the ‘Tenant Tax’ – and if you have already felt the effects, this will likely be the worst yet.
The landscape of buy-to-let is always changing, and although being a landlord is still a rewarding experience, being prepared (well, as prepared as you can be) for the worst is absolutely essential – which is why it’s pertinent to seek advice sooner rather than later.
As the fourth and final stage of Section 24 approaches, you may have heard that by April 2021, buy-to-let landlords will only be able to claim tax relief on finance costs at the basic rate of 20%.
You may also be aware that if you own one or more properties, you may be pushed into a different tax threshold – and those in the highest tax bracket of 40% and above will be hit the hardest.
If you’re feeling unfairly done by, the good news is that there’s still time to act and perhaps take some of the sting out of the new Section 24 amendment to the UK tax law.
As co-founder of Scotland’s only estate agent for landlords, I’ve outlined all you need to know about the tax implications caused by the final stage of Section 24 and what it means for you – as well as some great tips and insight from a professional accountant.
DISCLAIMER: Please do not consider this tax advice. I’m simply sharing general, publicly available information, and we highly recommend you speak to an accountant about your individual circumstances before making any decision.
What is Section 24 and how will it affect you?
The Section 24 – full name, Section 24 of the Finance (no.2) Act 2015 – tax changes restrict tax relief for finance costs secured by private landlords on residential properties to the basic rate of income tax.
The reason behind it, according to the government, is to put a stop to the highest earning landlords from claiming the highest tax relief.
Lower income earners – landlords or ‘accidental landlords’ who own just one rental property – won’t feel much of the effects.
The changes have been gradually phased in over a four year period – from 6th April 2017 – to allow for landlords to adjust and adapt their strategies in light of the fact they’ll no longer be able to treat finance costs as a tax-allowable expense.
We’re now coming to the end of that four-year period, and landlords are now about to face the full brunt of these changes.
Section 24 affects you if you’re currently a landlord with any kind of loan or mortgage interest on your buy-to-let property. If, as is the case for many landlords, this covers a large proportion of your costs, you will have to pay tax on those costs, along with your profit.
There is another way you may be affected
Under Section 24, mortgage arrangement and broker fees are no longer tax deductible either – and it’s also worth mentioning that from April 2016, the ‘wear and tear’ allowances for landlords was scrapped, so you can no longer offset 10% against your net income.
Ah, the joys of being a landlord!
Previously, this was something landlords could do regardless of whether or not they replaced any items. Now, wear and tear is only applicable if you replace furniture like-for-like, so landlords may think twice about unnecessarily replacing furniture.
What are your options?
The good news is that you do have a few options. These include:
- Transferring your property into a partner’s name (if they’re in a lower tax bracket)
- Adding your partner’s name to the property, leading to joint ownership
- Transferring your property to a limited company (more about that below)
- Look at ways of reducing your finance costs and increasing your revenue (such as selling some properties)
Going down the limited company route does come with its own set of drawbacks, and (depending on how many properties you own) some additional expenses, as we’ve outlined in this recent blog.
Whatever your situation, it should go without saying that the first thing you should do is speak to an accountant who can look at your own personal circumstances, and help pinpoint the best way forward for you.
And, as it’d feel slightly irresponsible of me to write this blog without giving you some measured words from someone who actually happens to be a professional accountant, I found one!
Syed Ausat, an accountant at Shears and Dube, says:
“If you choose to transfer property to a limited company, this must be transferred based on market value, which is why it’s essential to get a professional valuation carried out.
“Keep this in your records, for your defence, if HMRC challenge your valuation in future, and ensure it’s in your company name rather than your personal one. If you are transferring property from your personal name to a limited company, then you also have to get permission from the Lender, and some lenders may also insist on getting a personal guarantee (PG).
“Please note, transferring properties from one owner to another are likely to attract Stamp Duty Land Tax (SDLC) and legal costs as well apart from Capital Gain Tax ( CGT).”
He continued: “Aside from opting for joint ownership, there are other options, but unfortunately they aren’t free. All have their pros and cons, and one solution may be more suitable for some individuals than others. I’d advise sitting down with your accountant and doing what’s known as an overall tax calculation to see what will work best for you.”
Portolio’s take on Section 24
You may be wondering what we think of all this over at Portolio. Say you’re a landlord who has a portfolio you’ve bought years ago, maybe back in the ‘90s or early ‘00s – you’d have absolutely no way of knowing that Section 24 was going to come out.
And likewise, if you’re in your 30s or 40s, using property as a legitimate way of investing for your retirement, then the chances are your retirement plans are now torpedoed by the government – and neither of those scenarios seem very fair.
However, at the same time, I do understand why Section 24 has been quite beneficial to the Private Rented Sector. It promotes a more professional landlord; one who’s encouraged to look at their portfolio as a business, carefully record all information, and keep safety certificates fully up to date.
Section 24 has, in turn, coupled fairly well with the increased lending restrictions, because lenders are now having to look at how everything fits in with a landlord’s overall portfolio.
Certainly, the whole circle of the PRS is becoming more professional, leading in general to better decision making by landlords and lenders alike, and an overall improved quality of property – with tenants benefitting, too.
TIP: The whole game has changed for you as a landlord, and it’s more important than ever to know what you can and can’t recover charges-wise. Speak to your accountant before January 22nd, 2021 to ensure you stay on top of the new changes.
Advice from the property pros
I know these new changes may seem unfair, but we do have to face them. As responsible landlords, burying our heads in the sand is the absolute worst thing we can do.
Property still works exceptionally well as an investment class, however, if you’re at all worried about the tax implications of Section 24, I’d say the overwhelming advice here is to consult with your chosen accountant in the first possible instance.
Syed Ausat (known as Ausat in the accounting world), has very kindly provided us with a little more insight into how a professional accountant should be able to help:
“One of the things an experienced accountant will look at will be how many properties you own. If you own several properties, it’s prudent to make up individual Profit & Loss accounts for each individual property, and perhaps consider selling any property which is generating less profit, or even a loss. Please note Capital Gains Tax (CGT) may also apply when selling properties.
“But remember, if you do nothing, then in the current tax year 2020/2021, where tax payable by 31st January 2022, you may have to pay more tax and you may also find yourself in the higher tax bracket.”
I hope you’ve found this blog on the tax implications caused by the final stage of Section 24 for landlords helpful, and that we’ve managed to shed some more light on how you may be affected.
I can’t stress enough how important it is to seek advice from a professional accountant to see how you can avoid some of the heavy tax charges due to be imposed on landlords as a result of the new rules.
Of course, for anything else property-related, myself and Ross are happy to listen and provide you with some free, no-strings advice. We would love to hear from you!
What’s your opinion on Section 24?
Written by Chris Wood, MD & Founder of Portolio
Get in touch on 07812 164 842 or email email@example.com