Section 24 - HMRC UK Tax Changes - National Residential

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Section 24 – HMRC UK Tax Changes

Section 24 Means Buy To Let Landlords Can No Longer Offset 100% of Mortgage Interest Against Rental Income.

Section 24 - Her Majesty's Revenue & Customs logo Section 24 is a HMRC taxation change affecting what costs can be deducted from rental income to calculate ‘Net Profit’ – i.e. the figure counted as income and the figure that you will pay taxed against.

As tax relief drops, tax bills will rise and in some cases taxes owed will be more than the income minus costs.

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”.

section 24 tax payments prediction

The tax relief that private landlords of residential properties will be able to claim for finance costs is being restricted to the basic rate of Income Tax (20%) for the lowest amount between finance costs, property business profits or adjusted total income.

Until April 2017 mortgage interest was an allowable expense so ‘Net Profit’ represented rental income minus mortgage interest and any other allowable expense.

After 2021, Net Profit will be calculated on rental income minus allowable expenses but NOT including mortgage interest.

The changes are being phased in over a four year period with the amount of finance that can offset income being reduced from 100% to 0% in 25% steps.


2016 /17 – 100% TAX RELIEF

100% of 360,000 = £360,000

Taxable income, (450,000 – 360,000) = £90,000

Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£47,000*40% = £18,800

Total Income Tax = £25,200

2017/18 – 75% TAX RELIEF

75% of 360,000 = £270,000

Taxable income, (450,000 – 270,000) = £180,000

Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£137,000*40% = £54,800

Total Income Tax = £61,200


2018/19 – 50% TAX RELIEF

50% of 360,000 = £180,000

Taxable income, (450,000 – 180,000) = £270,000

Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£227,000*40% = £90,800

Total Income Tax = £97,200

2019/20 – 25% TAX RELIEF

25% of 360,000 = £90,000

Taxable income, (450,000 – 90,000) = £360,000

Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£317,000*40% = £126,800

Total Income Tax = £133,200


2021 onward – 20% TAX RELIEF

20% of 360,000 = £72,000

Taxable income, (450,000 – 72,000) = £378,000

Income Tax calculation:
£11,000*0% = £0
£32,000*20% = £6,400
£335,000*40% = £134,000

Total Income Tax = £140,400




NB. These calculations (together with the others on our case studies page) are intended as approximate illustrations only and may contain minor inaccuracies. We strongly recommend anyone concerned about the effect of Section 24 on their tax bills should discuss the implications with their accountant and get a detailed, tailored projection.

For the government guidance on working out the effect of Section 24 tax relief abolition, see How to assess the impact of Section 24 from 6 April 2017.

The most consistent advice given to landlords and property investors by the HRMC and advisory bodies is make sure you keep informed and are prepared for the effects of Section 24 so you can make informed decisions and plans ahead of tax payment deadlines.

National Residential consultants are experts in property investment as well as property sales. Contact us today on 01244 757152 to find out how we can help landlords and property investors to respond to Section 24 tax changes.

What Can Landlords Do To Avoid Huge Tax Rises in Buy To Let Income

The worst affected by Section 24 will be the Buy To Landlords with the highest overall finance costs, especially landlords with finance loans on multiple properties. As a rule of thumb, the higher the finance costs, the more the effects will be felt. Landlords with smaller portfolios may still operate at a profit.

Landlords who find themselves operating at a loss may want:

Option 1: To offset the tax rises, some landlords may hope to raise rents and pass the costs on to tenants however tenants can challenge unfair or unrealistic rent rises (see Government Advice on Private Renting ) and landlords without finance costs who do not increase rents will be far more attractive to renters so that buy to let landlords who do increase their rents risk poor tenant retention and possible prolonged bouts of empty properties.

Option 2:An alternative option is to incorporate by transferring your property portfolio to a new company registered in your name however the transfers will be considered as a sale from the HRMC point of view and each sale will be liable to land tax and a higher rate of capital gains tax. There are also other implications such as the possibility of higher rates for business mortgages and other taxes including stamp duty to pay on the purchase of the properties.

Additionally, if the status change from personal to company isn’t properly reflected in accounting, practice etc theoretically at least, the HRMC may question the reasoning and challenge it as tax evasion (as they have done when closing other tax ‘loopholes’ with famously successful challenges against celebrities such as Jimmy Carr, Michael Caine and Gary Barlow to name a few).

If landlords do want to investigate this option, it is essential that they are well informed however the costs for expert consultation, advice and action can exceed £15,000.

Option 3: Another alternative option to avoid the tax rise is to lower financing costs. Property investors with larger portfolios (and among the worst affected) may wish to consider selling some stock in order to pay off mortgages on other property within their portfolio.

If you would like to compare the costs/advantages of this option to the cost/advantages of selling some property to reduce fiance costs, National Residential can provide outline figures and refer you to a reputable specialist in the area if required.

Whatever option you choose to follow, the most important thing is not to bury your head in the sand while waiting for your tax bill because your portfolio may already be running at a loss. Even if you delay making a decision, you must start looking at your options ASAP.

The most consistent advice given to landlords and property investors by the HRMC and advisory bodies is make sure you keep informed and are prepared for the effects of Section 24 so you can make informed decisions and plans ahead of tax payment deadlines.

How Urgent Is The Problem

Earlier this week, latest research from the National Landlord Association (NLA) confirmed what many in the industry had been saying anecdotally for several months; a significant number of landlords are already leaving the Buy To Let space with many more seriously considering following suit.

The NLA’s announcement that 20% of Buy To Let landlords are planning to reduce the number of homes they own this year highlighted just how significant an impact the recent changes as a whole have had on the private rental sector.

NLA: 20% of landlords plan on selling up

However, according to Landlord Referencing UK, circa. 1.4 million landlords are unaware of the drastic effect it is going to have on their rental income and their tenancies over the next 4 years.
See 1.4 million landlords unaware of Section 24 implications

Landlords with a relatively small profit margin may find that they will start making a loss on their rental income after the lower rate of allowable expense is introduced as part of Section 24 tax changes in April 2018

If those figures are accurate then many landlords will only become aware of the problem 18 months after the effect of the changes when they suddenly find they owe more in tax and/or lose other income (such as child benefit payments) than they earned in rent and are facing fines for late payment.

If those landlords also follow the trend in reducing the number of properties they own to reduce finance costs and/or keep their earnings out of the higher rate bracket, it is entirely possible that as well as a temporary flooding of the housing market, they will be forced to be very competitive on price.

Our advice is DO NOT WAIT UNTIL THE CHANGES AFFECT YOU, act now to get the best price and avoid late payment fines.

Also, there is no need to wait for a tenanted property to be vacated or to give your tenants notice because we specialise in selling property that estate agents will not sell. We have years of experience selling tenanted property. We are expert in the laws and methods that work best for everyone.

National Residential Specialise in Selling Rental Properties Fast and With Tenants In Situ, Minimising Periods of Outgoing Expenses With No Rental Income.

Why should property investors use National Residential to sell their properties:

  1. We sell property FAST (in 28 day auctions) and for 100% of The Market Value
  2. We actively market properties offline in local estate agencies, online on our site and property sales boards (e.g. Rightmove, Yahoo, Prime Location etc) and by telephone.
  3. We can manage the whole viewing, sales & completion processes on your behalf.
  4. Our rigorous buyer approval procedures together with the Terms & Conditions of our sales result in 95% of our agreed sales completing.
  5. We have multiple sales options including our SSR Option where buyers pay all fees AND all options are no sale, no fee.
  6. We encourage bidding competition between private buyers and property investors by keeping people informed throughout our auctions through automated texts/emails and through consultants’ telephone calls.
  7. Most estate agents will not accept tenanted properties or expect the seller to arrange and guarantee vacant possession on completion however we have sold hundreds of tenanted properties with minimum disruption to rental income and we manage all aspects of completion including tenant eviction. We usually complete tenanted sales (even with illegal subtenants in situ) with a vacant possession in the same timescale other agencies manage normal completions.See Selling Tenanted Property + Complications Of Selling Tenanted Property
  8. We also have sales options where we can advance capital to fix other problems stopping people getting the best price for their property such as short leases, disrepair, poor presentation etc.


Who Is Affected By Section 24 Tax Changes?

Landlords of any residential property held in a private name will be affected by Section 24 rules on mortgage interest relief including HMOs and Student properties.

Properties owned by Limited Companies are not affected by Section 24.

Contact National Residential on 01244 757152 today to find out how we can help you, including options to transfer your property to a Limited Company. Alternatively fill in this form and we will phone you back when at your convenience.


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