The introduction of section 24 is an amendment of UK tax law which affects landlords, limiting the tax incentives that are available to them in the rental property market. The change came into force on 6th April 2017, significantly impacting buy-to-let landlords. The measure eventually phases out existing tax relief which is available to residential property landlords by April 2020.
Section 24, also informally known as ‘tenant’ tax’, marks the gradual phasing out of cost relief by April 2020, so buy-to-let landlords will no longer be able to class finance costs as tax-deductible, such as mortgage interest.
If you are in the position where you have taken out a loan or you’re paying mortgage interest on your buy-to-let property, you will begin paying tax on these costs in accordance to the timeframe and percentages stated below:
You will be able to claim tax relief at the higher rate on 75% of finance costs. The remaining 25% will be available with the basic rate of tax relief applied.
You will be able to claim tax relief at the higher rate on 50% of finance costs. The remaining 50% will be available with the basic rate of tax relief applied.
You will be able to claim tax relief at the higher rate on 25% of finance costs. The remaining 75% will be available with the basic rate of tax relief applied
You will only be able to claim tax relief at the basic rate level.
This applies to UK resident landlords with residential rental properties, non-UK resident landlords with residential rental properties in the UK and partnerships and trusts with residential rental properties.
The measure restricts income tax relief which is available on residential property, pushing this in line with the basic rate of tax. This balances the scales as higher rate taxpayers will no longer receive preferential tax treatment. As a result, higher tax rate landlords are expected to feel the full weight of the measure as of April 2020 as a larger tax bill could result in a reduction of profit. The hike in tax payments could contribute towards financial distress, halt cash flow and restrict the amount of working capital available to the business.
There are remedial strategies you may be able to take to minimise your losses by speaking to a specialist accountant or tax specialist. You may be able to restructure ownership of your portfolio and reduce mortgage payments to protect profits.
By seeking advice from a specialist accountant, you can best place your business to ensure that it operates in a tax-efficient manner and in line with HMRC guidelines by structuring your income accordingly. Handpicked Accountants is a platform which connects contractors, freelancers and small business owners with reputable and reliable accountants in your local area. Find an accountant through our online platform or contact a member of the Handpicked Accountants team on 0800 063 9258.