After more than 3 years of debate, the proposed changes to the way in which finance costs can be dealt with in a landlord business finally came into play for the 2017-2018 tax year and the end of this month marks the final day for any such tax returns to be submitted and paid. Despite that being the case many Landlords are still unaware of this change and it will be this first increased tax bill that spikes their interest! So with that in mind what is Section 24 all about and how will it affect landlords?
Basically the percentage of finance costs (interest on mortgages, loans, overdrafts etc) that can be deducted as an expense from a landlords profit, prior to taxation, has been reduced from 100% to 75% and that is for the tax year 2017-2018. Next year the allowance drops to 50%, the year after 25% and finally for the tax year 2020 – 2021 it drops to 0%. However, at that stage landlords will be able to claim a basic rate allowance (20%) for their finance costs which will be offset against their tax bill. The obvious outcome to this change is that Landlords will now be perceived to have made higher profits and thus will now pay more in taxation. If you search the internet you will find lots of confusing examples as to how this may affect varying different landlords but in my own research I did come across a simplistic table courtesy of the Mortgage Works, that I think provides a perfect illustration. Please click the following link to view the table https://www.themortgageworks.co.uk/support/new_tax_system
Something else to consider as a result of this change is the impact it may have on a Landlords overall tax position. For example, if a Landlord is currently a basic rate tax payer then the additional perceived profits made from their property business may push them into the next income tax band resulting in even higher taxation!
Its worth noting that this change only impacts landlords that own property in their personal names and process the income from their property business through their personal tax return. Landlords that operate their property business through a limited company structure and Landlords that do not have finance related interest in their property business will be unaffected by these changes.
If you are a Landlord that is affected by these changes, I would strongly advise you get taxation advice now in order to ensure that your property business is as tax efficient as it can be!