Section 24 Tax Changes
So far the effects of Section 24 have not been felt by landlords. It will only be noticed when landlords file their Tax Returns for 2017/18 and learn that they are having to pay more Income Tax even though their profits may be the same. To make it even worse Section 24 is being phased in over the next 4 years so the full effects of Section 24 will only be realised with the 2020/21 Tax Return.
A business pays tax on it's profits, that is on the difference between Income and Expenditure and this is laid out in Generally Accepted Accounting Principles (GAAP). These Principles have been amended by Section 24 of the Finance Act (No 2) 2015 which changes the way that profit is calculated for landlords.
In essence a landlord who has their property portfolio held in their individual name is not allowed to claim the mortgage interest payments as an expense. The result is, that on paper, their profits will increase and therefore so will their Income Tax even though the reality is that their profits have not actually changed. This will be particularly painful for higher rate taxpayers.
Strangely this Amendment doesn't apply to any other business, not even to landlords who hold their properties in a company. Where is the logic in that?
The amendment is also introducing a new Finance Tax Relief of 20%. So if you're a lower tax payer (20%) the amendment makes no difference unless the increased profit pushes you into the Higher Tax bracket.
No wonder that landlords are feeling victimised! For many, 'It's the straw that broke the camel's back' and consequently they are selling their properties. This of course presents an opportunity for those with the knowledge.
If you know of any landlords who are contemplating selling up please point them in our direction as we may be able to help them.
Contact Andrew and Mark