SECTION 24: big change for landlords

A big change for landlords as the government has introduced the much feared change by landlords, Section 24.

Section 24 of the Finance (no. 2) Act 2015 might mean that over half of UK landlords will be pushed into a higher rate of tax despite their income not having increased, and some might end up renting at a loss.

Landlords used to have been able to deduct the full cost of their mortgage or loan interest payments on their rental properties before they pay tax. Unfortunately from April 2017, these costs will no longer be considered in calculating taxable rental income.

The government marked a start in April this year of a four year phase in of section 24. This change will gradually be made over the next four years and therefore will not impact on tax returns being submitted now however it can make major change to a landlords financial situation.

Who will this impact?

This change will impact landlords who have one or more residential properties which earn a rental income and are owned in their own name. Commercial properties are excluded along with properties being owned by limited companies.

What is the change?

The government announced that interest and financial cost related to the mortgage or loans will no longer be an allowance expense for landlords when calculating the rental profit. This is a major change in the property industry and will affect many landlords who use their property as either a top up on their salary, nice income for retirement or a complete business income from the many properties the landlord(s) own.

Limited company

The change will not affect limited companies that own the properties. Subject to the landlords financial situation, many are changing their ways and incorporating companies to own the property. Legal and tax advice must be sought in order to determine this option being suitable for yourself as each landlord circumstance can be different to another.

 

Interests to be restricted

Under the change interest charges will no longer be an allowable expense. This means that the full income of the rent will be taxed rather than the amount after the interest expense. This may make life very difficult to landlords who have adopted an interest only business plan to rent out properties.

Example of costs:

If a property earns you a rental income of £1,000 per month, with £2,000 allowable expenses and £2,000 interest costs, prior to this change your rental profit would be £8,000. Under the new change the interest cost will no longer be an allowable expense, and therefore the rental profit would be increased to £10,000. This amount would than be taxed subject to your tax bracket.
The change will gradually be phased in over the next few years. In the tax year 2017/2018 the mortgage interest and finance cost will be restricted to 75%. In 2018/2019 it will be restricted to 50%, in 2019/2020 to 25% and in 2020/2021 it will be 0%.

If you are a landlord or thinking of becoming a landlord, we would recommend you to seek independent legal and tax advice.

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