The effects of Section 24 & updates for the new tax year

The legislation in Section 24 of the Finance Act 2015 was one of the biggest challenges landlords have had to face in modern times

Known as the ‘Tenant Tax’, it has cost many rental property owners thousands of pounds.

 

But what is it, and how does it work?

Section 24 removes a landlord’s right to deduct finance costs, including mortgage interest and arrangement fees, from their rental income before calculating their profit from rental income.

The landlord can then claim back a tax credit equivalent to 20% of annual mortgage interest.

This means landlords have to pay tax on the gross income they earn from a rental property. This can often lead to landlords entering a higher tax bracket and cause further costs with repayment of Child Benefits and Student Loans, as well as a higher tax charge as the interest relief, is given as a flat 20% deduction on the overall tax bill.

 

An example of how a landlord will be affected

Bob earns £48,000
He has two children and receives Child Benefit
He owns 1 rental property – which generates rental income of £12,000 after costs and incurs £12,000 of interest

	Under the old rules	Under the new rules (S24)
Salary	£48,000	£48,000
Rental Income	£12,000	£12,000
Less Mortgage Interest Old Rules	-£12,000	£0.00
Total income	£48,000	£60,000
Tax Due at 20%	£7,086	£7,540
Tax Due at 40%	£0.00	£3,892
Child Benefit Repayment	£0.00	£1,885
Less Finance Relief New Rules	£0.00	-£2,400
Total Tax due	£7,086	£10,917

 

As we can see this is one property – and even if we assume that most landlords are already repaying Child Benefit – then the tax due still leaps up.

Landlords have long been a target of successive governments and often the costs of transferring property to a limited company can be prohibitive – it becomes more and more important to ensure refinancing models and taxation projections are looked at to ensure the property ownership still makes sense and what options are available.

If you would like to read more about the Section 24 petition then click here.

 

There are also several updates that come in from the new tax year

Corporation Tax

·       The Corporation Tax rate has risen to 25%. 

Capital Gains Tax

·       Capital Gains Tax threshold to decrease to £6,000 from the 6th of April 2023

Second-Home Owners

·      From April 2023, second-home owners will have to prove holiday lets are being rented out for at least 70 days a year to access small business rates relief, where they meet the criteria.

 

If you are in need of more advice, contact our team at your local branch, who will be happy to help.

 

Robert Bowden, property tax expert, specialising in developers and investors in the property sector.