Section 24 impact on landlords

So, what is Section 24?

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.

 

How section 24 works for landlords

The changes introduced have been introduced in phases:

  •  in 2017 to 2018 the deduction from property income was restricted to 75% of finance costs, with the remaining 25% being treated a basic rate tax reduction of 20%
  • from 2018 to 2019, landlords were able to offset 50% of finance costs, with the remaining 50% treated as a basic rate tax reduction of 20%
  •  in 2019 to 2020 (current tax year), landlords can obtain 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs landlords incur will be given as a basic rate tax reduction of 20%

 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:

  • finance costs not deducted from income in the tax year (25% from 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
  • profits of the property business in the tax year
  • taxable income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year
 

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.

 

Section 24 applies to:

  • Landlords who are UK residents with residential rental properties, regardless of location
  • Non-UK resident landlord with residential rentals based in the UK
  • Partnerships and Trusts with residential rental properties
 

Section 24 Impact on landlords

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.

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