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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.

Continue reading Section 24 – HMRC UK Tax Changes


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