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Section 24: Changes To Mortgage Interest Relief

Section 24: Changes To Mortgage Interest Relief And How It Will Affect You

| Overview

There has been plenty of publicity, objecting and debate surrounding the new section 24 law that was brought in from April 2017. Many have called it “the most thoughtless and destructive piece of legislation ever applied to the private rented sector”. This is a massive complication to countless landlords and one of the major changes seen by the buy-to-let sector – ever!

Where Has This New Law Come From? And Why?

Presently, landlords pay tax on profits they receive. The sum of tax paid depends on the profit made. Simple. Not anymore!

In July 2015, when George Osborne delivered his summer budget, he said he was going to curb the amount of tax relief landlords receive on buy-to-let mortgages. What this means is, you now don’t get taxed only on your profit, you get taxed on your gross monthly income. In other words, you’ll be taxed on the full amount of rent you receive and before your mortgage interest is paid.

He said he wanted to “create a more level playing field for those who are buying to let and those who are buying a home to live in. Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot.”

To help landlords adjust to losing such a massive tax off-set, this is being phased in over a period of 4 years, rather than all immediately.

Section 24

Section 24 is prohibiting a perfectly genuine finance cost to individuals operating buy-to-let properties. It stops landlords offsetting the core cost of their business (mortgage interest repayments) when arriving at their profit. Every business can offset running costs against their income before being taxed on any profit that is remaining. It’s a significant factor in accounting principles, but Section 24 changes this vital business principle.

The tax landlords are expected to pay can now be more than any the profit they receive and in turn, means the tax landlords pay can now be more than what they’re making on their property.

This is also only aimed at individuals owning properties in their own name and excludes corporations, institutions and overseas landlords.

One landlord, speaking to freemoov stated: “Nobody hassles Tesco for making a business out of a fundamental need of providing food. Nobody hassles M&S or H&M for providing a fundamental need of clothing, and for making a business out of it. Why are we victimised as landlords for making a business out of providing one of the other fundamental needs – housing. We don’t take properties away from homebuyers, we provide decent homes, we renovate homes that often aren’t suitable for anyone to live in – and if you get rid of all landlords tomorrow, it doesn’t make all tenants homebuyers. There are a lot of people who want to rent – and have to rent – and it doesn’t matter if you have private landlords or not, you’re never going to be in a position where you can make everybody a homeowner.”

Increased Rents And ‘Tenant Tax’

With business, the end user picks up the tax bill. In the property business, that end user is the tenant. When VAT increases, it’s not business’s selling products or services paying that extra tax, it’s the customer. For that reason, Section 24 has been mooted as ‘Tenant Tax’.

Many landlords have mentioned increasing rents and if landlords can’t achieve the new rental price, then they may be forced to sell, which in turn could force tenants to find rental property elsewhere.

With countless landlords being forced into this situation, it makes rental properties more difficult to find. Lending on buy-to-let properties has already declined, not only reducing supply, but increasing demand. Simply put, more demand – more price increases, coupled with, less supply – big price increases.

It’s alleged that 97% of 2 million UK landlords have three properties or less and not engaged in regular landlord issues.

What all of this essentially means is that landlords cannot claim mortgage interest or any other property finance as being tax deductible. Rental property will now be taxed with a maximum deduction for finance costs of 20% (in line with the basic tax rate) by 2021.

Will I Be Affected By Section 24?

Landlords with a loan or mortgage interest on a buy-to-let property will be affected by Section 24 and especially if you have high loan-to-value ratios and large mortgages. The interest you could offset before can no longer be offset. You’ll be paying tax on the overall rental income.

What Are The 4 Phases?

Phase one

From April 6th 2017, the highest rate tax relief can still be claimed – but now on the first 75% of your mortgage interest costs (not at 100%). The remaining 25% will have the basic rate of tax relief applied.

Phase two

From April 6th 2018, the amount of tax relief that can be claimed at the higher rates drops to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.

Phase three

From April 6th 2019, the amount of tax relief drops to just 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.

Phase four

By April 2021, you will only be able to claim tax relief at the basic rate level of 20%.

A Working Example

If you have a property with an outstanding mortgage of £150,000 with a mortgage rate of 4%. The annual mortgage interest repayment would be £6,000.

The property earns £15,000pa rental income. Below is how the example will play out.

2016/2017 – mortgage interest repayments of £6,000 can fully be taken off the income of £15,000. You are then taxed on the profit, which is £9,000.

2017/2018 – mortgage interest repayments remain the same at £6,000. But the relief drops from 100% of the interest repayment to 75%. This means paying tax on 25% more of the interest repayment, an extra £1,500. A total taxable profit this year of £10,500.

2018/2019 – mortgage interest repayments stay the same at £6,000. But interest relief has now dropped to 50%. So, another £3,000 that gets added, meaning a total taxable profit this year of £12,000.

2019/2020 – mortgage interest repayments still at £6,000. But now only a 25% relief rate. But interest relief has now dropped to 50%. So, another £4,500 that gets added, meaning a total taxable profit this year of £13,500.

2020/2021 – mortgage interest repayments still the same at £6,000. But interest relief has now dropped to 0% So another £6,000 that gets added, meaning a total taxable profit this year of the full £15,000 of the rental income and a substantial increase from just £9,000 a few years before.

Depending on what tax bracket you’re in, you could end up paying 40% tax on these amounts.

If you are a landlord with property in negative equity, speak to our bespoke property debt experts. We are FCA regulated and offer a FREE Consultation.


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