Section 24 is an amendment to UK tax law – announced by The Chancellor of the Exchequer in the Summer Finance Bill of 2015, and introduced on 6th April 2017. Section 24 impact on landlords is it restricts the amount of income tax relief landlords will be allowed to receive on finance costs down to the basic rate of 20%. Landlords are no longer able to deduct all of their finance costs from their property income to arrive at their property profits.
For landlords, finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.
The changes introduced have been introduced in phases:
In place of finance costs being a tax-deductible will be a 20% tax reducer. This tax reducer is calculated as 20% of the lower of the:
Any excess finance costs can be carried across to the following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
The result of landlords not being able to offset the full finance costs from property income will increase their taxable profit, effectively pushing some landlords into a higher tax bracket, leaving them with a high tax bill. The higher geared your property portfolio, the greater income you will be deemed to have received.
One of the trending solutions to mitigate the impact of section 24 mortgage relief is to incorporate your property portfolio. The risks associated with incorporating your property portfolio is it may trigger capital gains tax in the process, and you’ll also have to pay income tax, or dividend tax when extracting profits from the company (plus Corporation tax), effectively leaving you with tax-inefficient.
Section 24 impact on landlords will be unique to the individuals tax position. Burying your head in the sand, or taking a one-size-fit all solution is not advised. Be sure to seek professional advice from a property tax specialist to explore all your possible options for mitigating 24 section.