Section 24: Will it affect you as a landlord?

The government looks set to press ahead with controversial changes to the tax regime for small landlords that were set in motion last year. This will affect landlords in a number of different ways and in my opinion will have a significant knock on affect to the tenants which was not the government intention. In some parts of the industry Section 24 has been nicknamed The Tenant Tax which I am afraid it may become better well known by in the future.

The tax changes at a glance

The changes apply to the tax relief that landlords are currently able to claim on mortgage interest payments generated from their rented properties. Landlords are currently able to deduct the full cost of mortgage interest payments from rental income before paying income tax, however, Section 24 of last year’s Finance (No. 2) Act will change this gradually over the period from April next year to 2020.

For income tax purposes, all rental income will be considered as personal income, without deducting mortgage interest costs first.

The amount of income tax relief that higher rate tax paying landlords receive on their mortgage will be effectively reduced from 40% to 20%, and for top rate payers from 45% to 20%.

Existing landlords with a mortgage who are on the higher or top rate of income tax will see an increase in their tax bill. Landlords who are currently on the basic rate will be affected in one of two ways:

1. If their gross annual rental income plus other income is below the higher rate income tax band (£45,000 from next year) then their tax liability will remain unchanged. The government estimate this will apply to 82% of landlords.

1. Landlords who currently pay the lower rate may be pushed up into the higher rate band. This will apply to those whose gross rental income plus other income is above £45,000, not just those whose net rental income (once finance costs have been deducted) are above that level

The above could have significant consequences for some landlords. For example: if you are a landlord with a relatively large number of low yield properties, generating a large amount of rental income but also paying out a lot in mortgage costs, you could face a large tax liability and little to pay it with. Some scenarios could even see landlords pushed into a position where they pay more out in mortgage and tax than they receive in income.

Please follow the link below for some examples from HMRC:

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

At Naylor Powell we are very keen to work with all our landlords to ensure that their property investment is protected.  It may be the case that a small increase in rent will cover any additional costs or a restructure of borrowings may be necessary.

We have established relationships with tax advisers and financial advisers should you require further information.  Alternatively if you would like to discuss your property further with me please feel free to call James Birt on 01452 504813.

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