So whether you’re a full-time property investor or an accidental landlord, section 24 (of the Finance (no. 2) Act 2015), will affect you in some way, shape or form.
Section 24 was first introduced in April 2017, with a definitive timeline of 4 years for which it would be fully implemented in. So what does it mean?
In simple terms, you will no longer be able to claim mortgage interest, or any other property finance you have in place, as tax deductible.
Instead, rental profit will be taxed with a maximum deduction for finance costs of 20%, the basic tax rate, by 2021.
So effectively for any landlords who have a loan or mortgage on their buy to let properties they will now pay tax on those costs and profits. Now remember this blog isnt written by a financial accountant or tax advisor, I am merely a property investor who has had to change my strategy moving forward due to this announcement.
I would urge you to seek professional advice after reading this blog, of course.
To add more fuel to fire, any mortgage arrangements and broker fees will also no longer be tax deductible. This is a kick in the teeth, especially as we lost the wear and tear allowance in April 2016 too. So back to S24 4 year phases, here is a quick summary of how it started and will continue to be phased in:
PHASE 1 Post April 6th 2017, the higher rate tax relief can still be claimed on the first 75% of your mortgage interest costs.
The remaining 25% will have the basic rate of tax relief applied.
PHASE 2 Post April 6th 2018, the amount of tax relief you can claim at the higher rates will drop to 50% of your mortgage interest costs.
The remaining 50% will have the basic rate of tax relief applied.
Post April 6th 2019, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs.
The remaining 75% will be at the basic rate.
PHASE 4 Post April 2021, you will only be able to claim tax relief at the basic rate level of 20%.
Section 24 also applies to the following:
-UK resident landlords with residential rental properties anywhere in the world
-Non-UK resident landlords with UK based residential rental properties
-Trusts & partnerships with residential rental properties
So what options do you have?
A lot of investors are now setting up LTD companies to buy property or transferring these into a LTD company for those properties they already own. Please note though, there may be charges incurred for transfers so once again please get professional advice.
For those who fall into the higher tax bracket being unable to offset of the mortgage interest or finance will mean your ‘income’ will be more and subsequently your tax more, when in reality you was benefiting prior to s24 with mortgage interest offsetting.
Higher tax therefore means you will earn fewer profits. This may explain why headlines are shouting higher rents are imminent as landlords need to clawback some of their losses. However, just because tax changes have been introduced I don’t advise you simply hiking up rents for many reasons I am sure you can guess.
So for anyone serious about investing in property long term, I urge you to look into the implications of s24 on your own portfolio with specialised accountants and advisors. Property is a fantastic vehicle to provide wealth and cash flow but only if you know what you are doing.
I hope this helps.
Have an awesome day!