Buy To Let Section 24 Finance Expenses, Tax Changes
NB. All figures are intended as a guide only. The calculations have not been confirmed by the HMRC however they are based on the formula given on the HRMC guidance – please see HMRC Case Studies re Section 24 Tax Changes
Anyone considering selling their property based on these figures should seek confirmation from their accountants. National Residential cannot be held accountable for any inaccuracies in the information given.
All case studies are based on before 2017 (i.e. before the tax changes come in force) or after 2021 (i.e. after the gradual changes have been phased in).
The 4 phases are:
- 17/18: 75% of finance costs deductible from rental income, 25% basic rate tax reduction for finance costs.
- 18/19: 50% of finance costs deductible from rental income, 50% basic rate tax reduction for finance costs.
- 19/20: 25% of finance costs deductible from rental income, 75% basic rate tax reduction for finance costs.
- 20/21: 0% of finance costs deductible from rental income, 100% basic rate tax reduction for finance costs.
As summarised on Section 24 – HMRC UK Tax Changes, the biggest affect to tax bills will be to people whose income is taken into the higher tax brackets however people whose tax remains the same could find that they lose some benefits as the amount classed as income will change.
As a general rule of thumb, the bigger the finance costs are, the bigger the effect of Section 24.
Rent: 650 pcm = £7,800 pa
Mortgage interest: £450 pcm = £5400
A person paying basic rate of income tax (20%) before 2017
Other income = £26,000
Property income calculation (1 property):
Rental income = £7,800
Finance costs = – £5,400
Other allowable expenses = – £1,000
Property profits, 7,800 – (5,400+1,000) = £1,400
Total income (26,000+1,400) = £27,400
Income Tax calculation:
£11,000*0% = £0
£16,400*20% = £3,280
£0*40% = £0
Final Income Tax = £3,280
A person paying basic rate of income tax (20%) after 2021
Other income = £26,000
Property income calculation (1 property):
Rental income = £7,800
Other allowable expenses = – £1,000
Property profits (7,800-1,000) = £6,800
Total income (26,000+6,800) = £32,800
Income Tax calculation:
£11,000*0% = £0
£21,800*20% = £4,360
£0*40% = £0
Total Tax = £4,360
Less 20% tax reduction for finance costs (£5,400*20%)= -£1080
Final Income Tax (4,360-1080) = £3,280
A person paying basic rate of income tax (40%) before 2017
Other income = £46,000
Property income calculation (1 property):
Rental income = £7,800
Finance costs = – £5,400
Other allowable expenses = – £1,000
Property profits, 7,800-(5,400+1,000) = £1,400
Total income (46,000+1,400) = £47,400
Income Tax calculation:
£11,000*0% = £0
£32,00*20% = £6,400
£4,400*40% = £1,760
Final Income Tax (6,400+1,760)= £8,160
A person paying basic rate of income tax (40%) after 2021
Other income = £46,000
Property income calculation (1 property):
Rental income = £7,800
Other allowable expenses = – £1,000
Property profits (7,800-1,000) = £6,800
Total income (46,000+6,800) = £52,800
Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£9,800*40% = £3,920
Total Tax = £10,320
Less 20% tax reduction for finance costs (£5,400*20%)= -£1080
Final Income Tax (10,320-1080) = £9,240
(+ £1080 on 2017 figures)
Rent: 1,500 pcm = £18,000 pa
Mortgage interest: £1,200 pcm = £14,400pa
Before 2017
Other income = £20,000
Property income calculation (4 properties):
Rental income = £72,000
Finance costs = -£57,600
Other allowable expenses = -£8,000
Property profits, (72,000-65,600) = £6,400
Total income (20,000+6,400) = £26,400
Income Tax calculation:
£11,000*0% = £0
£15,400*20% = £3,080
£0*40% = £0
Final Income Tax = £3,080
After 2021
Other income = £20,000
Property income calculation (4 properties):
Rental income = £72,000
Other allowable expenses = -£8,000
Property profits (72,000-8,000) = £64,000
Total income (20,000+64,000) = £84,000
Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£41,000*40% = £16,400
Total Tax = £22,800
Less 20% tax reduction for finance costs (£57,600*20%)= -£11,520
Final Income Tax (22,800-11,520) = £11,280
(+ £8,200 on 2017 figures)
Rent: 1,500 pcm = £18,000 pa
Mortgage interest: £1,200 pcm = £14,400pa
Before 2017
Other income = £0
Property income calculation (50 properties):
Rental income = £900,000
Finance costs = -£720,000
Other allowable expenses = -£75,000
Property profits, (900,000-795,000) = £105,000
Total income (0+105,000) = £105,000
Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£62,000*40% = £24,800
Final Income Tax = £31,200
After 2021
Other income = £0
Property income calculation (50 properties):
Rental income = £900,000
Other allowable expenses = -£75,000
Property profits (900,000-75,000) = £825,000
Total income (0+825,000) = £825,000
Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£782,000*40% = £312,800
Total Tax = £319,200
Less 20% tax reduction for finance costs (£720,000*20%)= -£144,000
Final Income Tax (162,800-144,000) = £175,200
(+ £144,000 on 2017 figures)
Rent: 800 pcm = £9,600 pa
Mortgage interest: £525 pcm = £6,300 pa
Before 2017
Other income = £0,000
Property income calculation (12 properties):
Rental income = £115,200
Finance costs = -£75,600
Other allowable expenses = -£15,000
Property profits, (115,200-90,600) = £24,600
Total income (0+26,600) = £24,600
Income Tax calculation:
£11,000*0% = £0
£13,600*20% = £2,720
£0*40% = £0
Final Income Tax = £2,720
After 2021
Other income = £0,000
Property income calculation (12 properties):
Rental income = £115,200
Other allowable expenses = -£15,000
Property profits (115,200-15,000) = £100,200
Total income (0+100,200) = £100,200
Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£97,200*40% = £19,440
Total Tax = £25,840
Less 20% tax reduction for finance costs (£75,600*20%)= -£15,120
Final Income Tax (25,840-15,120) = £10,720
(+ £8,000 on 2017 figures)
Finance costs include: mortgages, loans – including loans to buy furnishings and overdrafts.
Vanessa Warwick of Property Tribes said “I believe that Section 24 is the biggest threat that the private rented sector has ever had to face. It is a ticking time bomb.”
Chris Cooper of Axe The Tenant Tax said, “A perfect storm is brewing in the rental market, landlords will either have to raise rents or sell because of the tax rises. Landlords are sleepwalking into disaster.“
To find out National Residential can help you avoid the affects of Section 24, see our guide Section 24 What Can Landlords Do
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