This in-depth report will show you how “Section 24 Tax” can flip many income-producing property portfolios into portfolios that begin to lose money each month - - - - -

section 24 of income tax act header

​Section 24 of income tax act

Section 24 of income tax act – official name: “Section 24 Of The Finance (no. 2) Act 2015” – is a draconian tax introduced by George Osbourne, Conservative Party Chancellor – in the budget of 2015.

It's a tax that increases the tax liability of many UK landlords and in some cases will turn a profitable portfolio into a loss making portfolio.

Concerns about the effects of section 24 tax forms the single biggest worry among UK landlords today - and is prompting many landlords to consider selling their portfolios.

We'll examine section 24 of income tax act in the detailed report below - where you'll learn:

5 minute read

What is Section 24 of income tax act - and how will it affect you?

Section 24 in simple terms means that mortgage interest payments cannot be deducted from your final tax bill.

It affects all properties with mortgage finance that are held in personal names ie the majority of investment properties.

Section 24 does not affect unencumbered properties (​properties without mortgages). Nor does it affect properties that are owned by Ltd companies whether or not they have finance.

​It also doesn't affect commercial properties (shops, hotels etc), serviced accommodation, holiday lets etc.

​Section 24 - some simple maths

  • BEFORE SECTION 24 - Let's say you have a portfolio of properties with a rental income of £20,000 per annum (pa) and mortgage interest payments of £15,000 pa. Before the introduction of section 24 tax the profit you'll pay tax on is £5,000 pa (£20,000 - £15,000).
  • AFTER SECTION 24 - However after the introduction of section 24 the mortgage interest payments of £15,000 pa cannot be offset any more - so it's deemed that your profit is actually £20,000 pa.

In simple terms you're now being taxed on turnover (not profit) and in some cases this can have a devastating effect on rental income and overall portfolio profitability.

And you can be pushed into a higher rate tax bracket - meaning you pay more tax.

Why was section 24 introduced?

In essence section 24 is a tax on landlords to increase the ​tax revenues of the UK government. The ​government response is that it brings parity with owner occupiers - who can't claim any sort of tax relief on their mortgage payments.

One perceived government objective of section 24 is to encourage "accidental landlords" to give up and sell to professional property people. Because this is expected to improve the stability and profitability of the sector to the benefit of landlords and tenants alike.

However whichever way you look at it - it's a stealth tax.

Our opinion here at Property Portfolio Sales (for the record) is that it's a very unfair tax. Because it taxes people on properties they bought as investments - in good faith - under tax rules that had existed for years.

It's one thing to change the rules for newly bought properties where you're aware of the tax situation. But quite another to change the rules for existing properties.

This affects us and our portfolio - just as much as any other landlords.

section 24 of income tax act mortgage

Section 24 tax - phased in between 2017 and 2020

The introduction of section 24 tax is phased in over a number of years:

  • ​​<< 2017 - you're allowed to offset 100% of mortgage interest payments - this is the way it's always been.
  • 2017/18 - you're now only allowed to offset 75% of mortgage interest payments.
  • 2018/19 - you're now only allowed to offset 50% of mortgage interest payments.
  • 2019/20 - you're now only allowed to offset 25% of mortgage interest payments.
  • 2020 >> - you're now allowed to offset 0% of mortgage interest payments - this will be the situation ongoing.

20% mortgage tax reducer

In place of the ability to offset mortgage interest payments from rental income there will instead be a 20% tax reducer. This tax reducer is calculated as 20% of the lessor of these 3 things:

  1. Mortgage interest costs.
  2. Property profit (clearly excluding mortgage interest as a cost).
  3. Taxable income as a whole.

So that means whichever of the 3 items above is the lowest amount - you can claim 20% of this amount and ignore the other 2 items.

section 24 of income tax act reducer

20% mortgage tax reducer - phased in between 2017 and 2020 also

The introduction of mortgage tax reducer is phased in over a number of years:

  • ​<< 2017 - tax reducer not in existence.
  • 2017/18 - tax reducer set at 25% of mortgage interest payments.
  • 2018/19 - tax reducer set at 50% of mortgage interest payments.
  • 2019/20 - tax reducer set at 75% of mortgage interest payments.
  • 2020 >> - tax reducer set at 100% of mortgage interest payments - this will be the situation ongoing.

So hopefully you can see that HMRC are replacing the mortgage interest payments allowance - with the mortgage tax reducer allowance.

What's the net effect?

You may be wondering what the net effect will be of:

  • PAYING MORE TAX (Section 24) - by being taxed on profits instead of turnover VERSUS.
  • PAYING LESS TAX (Mortgage Tax Reducer) - by receiving 20% mortgage tax reducer instead.

For some landlords - typically lower rate tax payers who are well under the threshold - the net effect will mean that their tax bill doesn't change at all.

But for many others their tax bills will increase - some significantly - and some to the point where having a property portfolio actually costs them money - just by the existence of section 24 tax.

Who's likely to pay more tax?

​Those landlords who are likely to pay more tax due to the introduction of section 24 are:

1) ​Landlords earning just under Higher / Additional rate tax thresholds

​Those people earning just under ​the higher/additional rate tax thresholds ​are very likely to be pushed into that higher rate tax bracket. They'll be deemed to be earning more income - even though they're earning exactly the same as before - and so pay more tax.

2) Higher rate tax payers (40%)

​Higher rate tax payers will have more income taxed at 40% whilst only being able to claim back 20% via the 20% mortgage tax reducer.

3) Additional rate tax payers (45%)

​Additional rate tax payers will have more income taxed at 45% whilst only being able to claim back 20% via the 20% mortgage tax reducer.

4) ​Landlords earning just under the £100,000 income bracket

​If you're pushed over the £100,000 income bracket you'll lose £1 of personal allowances for every £2 earned.

5) ​Landlords paying into pension pots

You usually pay tax if savings in your pension pot go above the annual allowance. You’ll have a reduced ‘tapered’’ annual allowance if both the following apply:

  • Your income excluding any pension contributions (unless they’re paid as a salary sacrifice by your employer) is over £110,000
  • Your income including any pension contributions you or your employer makes is over £150,000.

For every £2 over the above-mentioned amounts, you will see a reduction of £1 to your pension contribution allowance.

6) ​Landlords receiving child benefit

​Those ​receiving child benefit - if section 24 tax rules causes your income to increase above £50,000 pa then your benefit will be affected.

Section 24 tax examples

OK that's a lot of information you've taken in so far about section 24. So here's some examples to illustrate.

The following examples are ​purposefully simplistic and don't include the complexities of life - such as other income, pension contributions, child benefit, spouse income etc etc. But they do accurately ​illustrate the affects of section 24.

The second example for a larger portfolio sees a tax bill increasing by £15,000 per annum - solely due to the effects of section 24 tax increase.

£15,000 is an eye-watering tax increase for any landlord to bear - and may explain why landlords in this situation are deciding to sell throughout the UK.

Example 1a basic rate tax payer

(before section 24)

  • ​£20,000 rental income (A)
  • £10,000 mortgage interest payments (B)
  • = £10,000 profit (A-B)
  • Tax to pay = 20% x £10,000 = £2,000

(after section 24)

  • £20,000 rental income (A)
  • £10,000 mortgage interest payments (B)
  • £20,000 profit (A)
  • Tax = 20% x £20,000 = £4,000
  • 20% Mortgage tax reducer (20% x B) = -£2,000
  • Tax to pay = £4,000 - £2000 = £2,000
  • No tax increase

Example 1b higher rate tax payer

(before section 24)

  • £20,000 rental income (A)
  • £10,000 mortgage interest payments (B)
  • = £10,000 profit (A-B)
  • Tax to pay = 40% x £10,000 = £4,000

(after section 24)

  • ​£20,000 rental income (A)
  • £10,000 mortgage interest payments (B)
  • £20,000 profit (A)
  • Tax = 40% x £20,000 = £8,000
  • 20% mortgage tax reducer (20% x B) = -£2,000
  • Tax to pay = £8,000 - £2000 = £6,000
  • Tax increase of £2,000 pa

Example 2a Professional landlord - large portfolio

(before section 24)

  • ​£125,000 rental income (A)
  • 75,000 mortgage interest payments (B)
  • £50,000 profit (A-B)
  • Tax to pay = 40% x £50,000 = £20,000

(after section 24)

  • ​£125,000 rental income (A)
  • £75,000 mortgage interest payments (B)
  • £125,000 profit (A)
  • Tax = 40% x £125,000 = £50,000
  • 20% mortgage tax reducer (20% x B = -£15,000
  • Tax to pay = £50,000 - £15,000 = £35,000
  • Tax increase of £15,000

Who isn't affected by section 24 tax?

  • Landlords with properties in their personal name but with NO MORTGAGE FINANCE are not affected at all by section 24.
  • Landlords with properties in Ltd companies (as opposed to personal names) aren't subject to section 24 tax. To be clear if you have properties WITH OR WITHOUT mortgage finance that are in LTD COMPANIES then section 24 tax will not affect you at all.
  • Holiday lets / serviced accommodation and commercial properties.
section 24 of income tax act landlord

Section 24 of income tax act - what can you do about it?

No wonder Section 24 tax concerns forms the single biggest reason why UK landlords are getting in touch with us here at Property Portfolio Sales – and asking if we’d be interested in buying their portfolios.

Because landlords are quite frankly fed-up with never ending tax increases and legislation changes that increase costs dramatically.

Section 24 tax is on top of many other tax increases and regulations – meaning landlords are increasingly looking to exit the rental market.

Section 24 - legal challenge

When section 24 was initially announced a group of landlords clubbed together to finance an appeal to fight the tax.

The appeal was in the form of a judicial review and was lead by Cherie Booth QC - wife of former UK prime minister Tony Blair.

Her key argument was that the proposed tax plan “discriminates against individual property investors by denying them the same rights as other business owners."

The legal argument claims that not allowing people to deduct mortgage interest before they calculate their profits overturns a fundamental business principle where income less costs equals profit.

​We'd 100% agree that taxing people on turnover instead of profits goes against all the principles of business - but unfortunately this appeal failed

Section 24 - ​lobby groups

​There have been a number of other petitions/challenges to try to overturn section 24 over the last few years - but so far nothing has worked.

The arguments range from:

  • It's unfair to tax landlords ​on turnover (not profit) - Cherie Booth's point already defeated.
  • Clause 24 has been termed "The Tenant Tax" as it's claimed the tax increases are simply passed on by landlords to tenants in the form of rent increases.
  • The private rental sector only exists because successive governments haven't built enough social housing. So if landlords sell up then rental ​housing stock reduces further.

​There are still lobby groups who are trying to address this issue with the UK government. For example the National Landlords Association and Residential Landlords Association are still very active.

Recent ​Landlord Surveys

​4,000

4,000 buy-to-let properties are sold by UK landlords each month - Ministry of Housing Report Aug 2018

Section 24 - can you mitigate the effects?

There are a number of things you can do to mitigate the effects of section 24 - but to be brutally honest there isn't a easy one-size fits all answer.

Here's our advice:

  1. Talk to your property accountant for professional advice.
  2. Reduce the amount of borrowing in your portfolio - Section 24 is effectively a tax on your borrowings - so can you reduce your mortgages?
  3. Can you sell some lower performing properties - to raise capital - to ​pay down other mortgages?
  4. ​Is it possible to ​share portfolio ownership ​with your spouse? If they're in a lower tax bracket than you - then ​they may be able to share the tax burden.
  5. Review your rents and increase where possible.
  6. ​Do you always claim all of your tax-deductible spending? Do a review to ensure you claim for EVERY expense.
  7. Do you or family members work in your business? If so you can pay salaries - and so reduce your profits and tax.
  8. If you buy any NEW properties then take good tax advice - which since the introduction of section 24 will probably mean buying as a Ltd company.
  9. Talk to your accountant about any strategies for converting EXISTING properties into Ltd companies. Be aware that the 3 big things to avoid here are i) SDLT (stamp duty), ii) Capital Gains Tax (CGT), iii) new mortgage costs. That's because converting to Ltd company is effectively selling the properties from yourself to your Ltd company.

Conclusion - section 24 of income tax act

You need to understand section 24 in quite some detail in order to be able to understand how it will affect your property income.

Our advice ​is always to talk to your accountant / Independent Financial Advisor – to get a true reflection of the state of your own portfolio and tax position.

For some landlords – typically lower rate tax payers who are well under any higher rate thresholds – the net effect of section 24 will mean their tax bills won’t change much – if at all.

However for many others their tax bills will increase – some significantly – and some to the point where having a property portfolio actually costs them money and so it doesn’t make sense to keep them any more.

​Kind regards​

property portflio sales phil calladine

Phil Calladine - portfolio consultant

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Phil Calladine
 

"Hi there - I'm Phil Calladine - living in Lymm in Cheshire, UK. I have a wealth of property knowledge - and I'm sharing it with you here on this website. I'm also a member of the NLA. Please don't hesitate to contact me with any questions about selling your property portfolio"

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