The Tenant Tax is starting to bite!

The Tenant Tax – Save Money and Stay Compliant

Here at TAG Accountants Group we have many clients with buy to let property portfolios, and we have noticed an increased number of enquiries regarding Section 24 (the so called “Tenant Tax”).

With that in mind, we thought it would be useful to summarise its effects and detail some of the actions that can be taken to help alleviate its impact.

What is the “Tenant Tax”?

Section 24 was first announced in the 2015 Budget and essentially set out to change the way in which landlords would calculate tax relief on mortgage interest and finance costs.

Consequently, since April 2017, mortgage, loan and overdraft interest costs are only allowable for basic rate tax relief and are not included in calculating taxable rental income, whereas landlords had previously been able to deduct the full cost of their mortgage interest payments on their rental properties in arriving at their taxable profit.

The changes were introduced on a phased basis over 4 years, starting from 5th April 2017. In the 2019/20 tax year, 75% of finance costs will be restricted to 20% tax relief, rising to 100% by 2020/21 – so the impact of this is really starting to bite.

This change resulted in many UK landlords being pushed into a higher rate of tax despite their income not having increased, resulting in a reduction in cash flow or even, in some cases, properties that had been profitable are no longer so.

Landlords originally within the 20% tax band who have been pushed into a higher tax bracket by these changes have then discovered that child tax credit assessments and student loan repayments are affected, which in turn has led to further increase in overall tax paid.

The impact of Section 24

It is important to say that if you have no mortgage on the properties you rent out, then Section 24 will not apply to you and your tax bill will broadly remain the same.

Essentially, Section 24 impacts most heavily on landlords with a mortgaged property portfolio and is mostly going to affect:

• Landlords with high loan to value rental property portfolios.

• Landlords with buy to let mortgages who are in the 40%+ tax brackets.

• Landlords in the 20% tax bracket who could now pay more tax where gross income (rental and other income) as recalculated is greater than £50k, which in turn could further affect any child tax credits received and student loan repayments made.

What actions can you take?

There are several courses of action that could help some landlords mitigate the impact of these changes:

• Increase rent to compensate- but you could price your property out of the market.

• Transfer your rental property portfolio into a limited company, which will see any profits taxed at 19% and no loss of tax relief on finance costs. However, you will need to prepare annual accounts to be submitted to Companies House and any remuneration could incur dividend tax. In addition, you could trigger stamp duty and capital gains tax when transferring your personal property portfolio to a company. 

• Move to capital repayments on your mortgages to cut down the amount of interest payments in the long term – only possible if the property generates enough income.

• If you are married or in a civil partnership and have joint ownership, you can make a declaration of beneficial interest of joint property to change the split of how the income is taxed between spouses.

• If income is close to entering the 40% tax band, then you could make additional pension contributions to help reduce your taxable income.

Always take professional advice

Everyone’s tax circumstances are unique, you should always take professional tax advice before implementing any new measures regarding your property portfolio. 

To discuss a more tax efficient strategy that is tailored to you, call us today here at TAG Accountants Group, Wolverhampton on 01902 783172 or alternatively just click HERE to email us via our website to book a FREE initial consultation with one of our friendly experts.

We very much look forward to hearing from you.