What is Clause 24?
Clause 24 was proposed by George Osborne in his Summer Budget on 8 July 2015 and it restricts finance cost relief for individual landlords. Companies are not affected, nor are landlords with no borrowings against their properties. The changes will be phased in gradually over 4 years, starting from 5th April 2017. By 2020, 100% of finance costs will be restricted to 20% tax relief only.
Landlords are currently able to offset all their finance interest against their rental income, before calculating their rent profits and, therefore, their tax bill. This is the usual way of calculating tax based on profit.
However, the Government has decided to break this normal taxation practice and require landlords to pay tax on part of their turnover. By the year 2021, it will still be possible to get a tax deduction for any interest on mortgage debt or other borrowings, but the amount will be capped at 20%. In most cases, interest is the landlord’s largest cost. As from April 2017, mortgage, loan and overdraft interest costs will not be considered in calculating taxable rental income – this will impact when landlords submit their Self Assessment returns by 31st January 2019.
The change will be introduced gradually over the next 4 years and could see many landlords paying more tax on their property income.
Section 24 applies to:
- UK resident landlords with residential rental properties anywhere in the world
- Non-UK resident landlords with UK based residential rental properties
- Trusts and partnerships with residential rental properties
Who is affected?
Landlords with high loan to value rental portfolios will be the most affected;
Landlords with buy to let mortgages in the 40%-45% tax brackets will pay more tax;
Those in the 20% bracket may pay more if their rental income plus other income is greater than £45,000, which could affect child tax credits and any student loan repayments.
What can landlords do?
There are a number of ways that could help landlords mitigate the new legislation.
Increase Rent Rent could be increased to ‘pay’ for any additional tax, however, you may overprice your property and reduce the number of potential tenants wishing to rent it. This will increase your void periods where no income is generated.
Mortgage Payments Mortgage Interest may be reduced in the long term by increasing your mortgage payments if you have a repayment mortgage.
Limited Company Putting your investment properties into a limited company will mean that your profits are taxed at 20%. However, this is not simply a general ‘rule of thumb’ as each landlord’s circumstances are different. Additional requirements – annual accounts, PAYE/NIC and dividends will all need preparing or calculating.
Specialist Tax Advice Again, depending on individual circumstances, there maybe ways of mitigating tax liability by, for example, splitting the income if the property is in joint ownership or using pension schemes to reduce tax.
Every landlord’s situation is different and professional tax advice should be sought before taking any action.
What to do Next…
If you think that you may be affected by these changes, please seek advice from your current professional adviser. If you would like to be put in contact with a recommended expert adviser, then please email us at firstname.lastname@example.org