There are many pathways you could take that would lead you to become a landlord. You may have purposefully pursued owning rental property to provide the public with high-quality, affordable buy-to-let properties. Perhaps you accidentally became a landlord through inheritance or some fortunate circumstances. Others have chosen it as a career path. Regardless of how you came to be a landlord or the type of landlord you are, Section 24 of the Income Tax Act will likely impact you and your tax bill. This news brings with it questions about the future. Will you pay more tax? Does it affect all properties (including commercial property)? How does Section 24 work, and who is exempt? The answers will help you in your plans for the future.
What is Section 24 of the Income Tax Act?
Section 24 was enacted to slow down and cool off the housing market in the UK, which was introduced in phases over four years and was fully deployed by 2021. The HMRC decided to accomplish this by making it harder to be a profitable landlord to push out the “unprofessional” landlords and slow down the market. This, in theory, would make it easier for first-time buyers to get on the property ladder and create stability for tenants. How did they do this? By reducing the amount of mortgage interest that landlords can deduct from their income and other finance costs. These costs are no longer fully considered “eligible operating expenses”, and only 20% of the interest payments are eligible for a tax credit. All the income from rental properties must be claimed, and you can apply for a 20% of interest payments tax credit. This can have severe consequences for those that operate rental properties because taxable income is increased and may bump you into a higher tax bracket. This is particularly true of those who still work jobs and have a regular income outside their buy-and-let properties.
Whom Does Section 24 Affect?
If you do not run your rental properties from a rental company, Section 24 will affect you. Are you running your rental properties through a property trust? Is your rental property filed as an individual or a partnership? If you have rental income, Section 24 will affect your tax bill. If you are operating your rental properties through a company, you are exempt from the Section 24 Income Tax Act changes. If you work furnished holiday rentals, you are also exempt from Section 24 changes.
In What Ways Can These Changes Impact Me?
By reducing the number of tax credits available for those operating rental properties, the gross profits of those individuals will increase, even if their income from the properties hasn’t changed. That means that regardless of their tax band, they will be required to pay more tax. If they are near the threshold of their tax band, the “increase in income” could bump them into the next tax band, significantly increasing their tax burden. Other aspects may also be affected by increased incomes and higher tax bands.
- Child tax credits may change
- Government and student loan repayment schedules may be adjusted
- Child benefits could be affected
Can I Reduce the Impact of Section 24?
With the significance of these changes, reducing the personal impact of the Section 24 changes will be an essential step in moving forward in your financial journey. What can be done if you are concerned that you will be negatively impacted by Section 24 of the Income Tax Act?
- Start a Limited Company
As discussed, limited companies are not subject to Section 24 in the same way as those operating as individuals or in partnerships. Incorporating and starting a limited company would reduce, if not eliminate, the impact of Section 24.
- Increase Rents
Unfortunately, those costs are typically passed onto the consumer when operating costs increase. By increasing your rent, you can recapture the increased costs of the taxes by increasing your revenue. This has its own challenges because your rents are often dictated by uncontrollable factors such as location and nearby amenities.
- Review Division on Profits
Review how you split your rental enterprise’s profits if you are in a partnership. If one spouse has a significantly lower income, it may make sense to transfer ownership and move over a more significant portion of the profits to them to reduce the amount of tax owed.
- Reduce Overhead
Without proper care and attention, overhead costs can quickly spiral out of control. By reviewing and making adjustments to your overhead costs, you may save up to 10% or more. These differences add up, particularly if you have more than one property.
- Be Aware of your Tax Threshold
Make sure you know where your tax threshold is and how close you are to crossing it. Professional help is a critical asset in saving money regarding your taxes. Paying attention to factors such as capital gains tax, stamp duty owed and other costs, and all sources of income will ensure you don’t accidentally cross a tax threshold you don’t have to.
- Sell Your Assets
Sometimes the only way up is out. If you want to avoid the hassle and headache of Section 24, you could sell your properties and get out of letting properties completely. This isn’t an option for everybody and may not even be feasible for some rental property owners, but it is wise to consider all your options, even the unlikely ones.
Section 24 of the Income Tax Act
Contrary to the famous axiom “Knowledge is Power”, the only true power comes from knowledge from which action is initiated. With the correct information and the willingness to act, you can make changes that could reduce the impact that Section 24 will have on your life and finances.