This week marks the start of the implementation of Section 24 of the Finance Act 2015 (No. 2), which will affect UK landlords with personally owed mortgages.
Announced in July 2015, the legislation will restrict mortgage interest tax relief for individuals renting out residential property and follows a raft of measures aimed at controlling the unprecedented growth of the buy to let sector over the last two decades.
Since April 2016 second home purchases have also been subject to a 3% stamp duty surcharge and, in January of this year, tighter borrowing requirements under Prudential Regulation Authority (PRA) criteria has resulted in higher deposits and more stringent rental stress testing.
David Cox, Chief Executive,
ARLA Propertymark comments on the increased taxes landlords have incurred over the last 12 months: “It’s been a year since the Government inflated Stamp Duty costs for landlords to 3%, and it’s already made the Treasury £1.3 billion. That’s more than changes to Mortgage Interest Relief, which are now in force, are expected to make in its first three years. This will only further squeeze the sector and make buy-to-let a less attractive investment for landlords.
Although many landlords are broadly aware of Section 24, many have yet to engage in a detailed evaluation of their own tax position. What do landlords need to know?
● The initial impact of Section 24 will only be truly felt upon receipt of the 2018/19 tax bill (due at the end of January 2019).
● The amount of interest that can be deducted from annual rental revenue will be phased in over the next four years. This tax year (2017/18) landlords can claim 75% tax relief; from 2018/19 there will be 50% tax relief; from 2019/20 25% tax relief will be granted and from 2020/21 onwards there will be no tax relief. Note, however, that there will be tax credit of landlords´ mortgage costs at 20% (the basic rate of income tax).
● Should you own properties in a Limited company structure, this legislation will not affect you (your property company will still be able to offset 100% of mortgage interest costs).
● The specific tax treatment will be entirely dependent on whether you are a basic rate or higher rate taxpayer. Landlords operating in the lower band may not be impacted at all by these changes.
● The higher the level of mortgage debt on a property or portfolio (referred to as leverage or gearing), the greater the potential tax liability.
In parts of the country where mortgage costs are higher, landlords may find themselves pushed into a higher tax bracket should their interest pay rates rise - particularly if they are also working or have other sources of income.
Advice from
Property Solvers is not to overly panic, as there is still plenty of time to make sure your tax affairs are in order. Some options worth exploring include reducing the amount of debt secured against the properties, transferring properties to a spouse or partner, or simply selling up to release equity.
Larger portfolio owners may also consider transferring properties into a Limited company structure and subsequently refinancing (provided a thorough cost-benefit analysis has been undertaken and any strategy has been confirmed with the HMRC).
