Section 24 – In April 2020, the final stage of the section 24 was implemented. The implementation of section 24 which is also known as 'tenant tax' means that the finance cost will no longer be an allowable expense. The private landlords will not get any tax relief on the mortgage interest instead they will get a 20 % tax credit that is the basic rate of the income tax. Other costs that are included in the finance costs are:
- Interests on the loans to buy furnishing
- Fees incurred to taking out or repaying the mortgages
How will Section 24 Affect the Buy to let landlord and what options do they have?
There are many landlords' especially small landlords or the 'accidental landlords' (As referred by many because they did not buy the property with the sole purpose of renting it) who won't find it financially feasible to stay in this market if the finance cost cannot be deducted as an expense. This is because previously the finance cost was treated as an expense and the landlords could offset it against the rental profit which resulted in paying less tax.
As a result of the changes in the section 24 these landlords are most affected and they have either left the market, are thinking of leaving the market by just selling their property or the only the solution they are left with is increase the rent which might make them less competitive.
One option the landlords have is to incorporate a limited company. When a landlord operates the property through the limited company, they can treat the interest on the mortgage as a business expense and pay the corporation tax on the remaining amount. The corporation tax is 19 % which is lower than the basic tax rate which is 20 % so the landlords will be better off.
The above structure would mean that the company needs to be set up, all the returns are supposed to be filed, all accounts need to be made and submitted on time. This can be time taking, might require some professional expertise and will be an addition in the costs incurred by the landlord however this cost can be expensed and deducted from the rental profits.
Landlords will also need to consider the consequences of capital gains tax and the stamp duty that might arise when selling the property. We have an option for those landlords who want to transfer their property portfolio into a limited company without paying CGT and Stamp Duty land Tax. Please contact Taxaccolega for more details and our expert team will guide you on this matter
If you are looking for other options to reduce your taxes as a landlord these days you might consider doing the following however, it will be better to seek professional advice:
The landlords can transfer the ownership of the property of their spouse- if your spouse has low income you can transfer the ownership of the property to your spouse and this will help you stay in the basic rate tax band, reducing the overall profits.
During Covid-19 many landlords are looking to use buy to let mortgage payment holidays- This will help improve the cash flows of the landlords who are struggling with their finances.
It should be kept in mind that there is no one solution which will fit all you. It will be better if you consult an accountant or a tax expert. If you are in surrey, Croydon or south hall and you need a tax advice of property, contact Taxaccolega at 020 8127 0728 or email us at info@taxaccolega.co.uk we will be happy to give you advise and accounting services on reasonable rates.