What is Section 24 and Why Was Permission For A Judicial Review Declined?

by Mark Alexander

20:43 PM, 9th October 2016
About 4 years ago

What is Section 24 and Why Was Permission For A Judicial Review Declined?

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What is Section 24 and Why Was Permission For A Judicial Review Declined?


“Section 24” of The Finance Act (No. 2) 2015  isn’t actually a tax change. It is an amendment to GAAP (Generally Accepted Accounting Principles). It changes the way that profit is calculated and then introduces “tax relief”.

Let us be clear what Generally Accepted Accounting Principles are.

If a business has income of £1,000 and has £1,000 of expenses then its profit is zero.

If a business makes a profit then those profits are subject to tax at varying levels depending on the structure of the business and the amount of profit made.

Another generally accepted accounting principle is that if a person borrows money to buy something for personal use they can’t offset the costs of financing that purchase against other income. That applies to pretty much any product you can think of, e.g, a bucket and sponge to clean windows, a computer, a vehicle or a property. However, if a business borrows money to buy any of these things with the intention of generating an income the costs of financing those investments are a legitimate business expense.

Section 24 changes everything, but only for individual landlords. Generally Accepted Accounting Princples are only being amended for individual landlords by Section 24. The legislation does not apply to any other business, not even to incorporated landlords!

When Section 24 is in full force £1,000 of income minus £1,000 of finance costs to purchase income producing assets = £1,000 of profit for private landlords only.

I can probably guess what any sane human being would be thinking when reading this for the first time and I agree. Bonkers isn’t it?

To add to the madness a new tax relief of 20% of finance costs will become available for individual landlords to deduct from the tax bill on their new fictitious profit. Presumably Government will seek to remove this at some point too on the premis that homeowners don’t get the same tax relief! (you’re  perfectly normal if you are shaking your head in disbelief at this point)

On 6th October 2016 Section 24 was challenged legally with a permission hearing for a Judicial Review. The grounds were human rights, discrimination and contravention of EU State Aid Law. Permission for a Judicial Review to proceed was denied on all three grounds.

Having sat through the hearing I can understand why. In my humble opinion, nobody addressing the Judge actually fully grasped that Section 24 had nothing to do with tax relief. There was no mention of Generally Accepted Accounting Principles whatsoever!

I thought Cherie Blair was very elequent at explaining why the consequences of Section 24 were unfair.  I also though she made a good job of playing to the gallery, the people who had funded her presence of course. The bottom line though was that she failed to achieve what she had been paid to do.

Having got all of that off my chest, you may be shocked to read that I think the refusal of permission for a Judicial Review to proceed could be a blessing in disguise.

If permission had been granted around £600,000 would have been needed to be raised in order to fund the full Judicial Review. That would have been a mammoth task and diverted attention and resource away from lobbying and looking for solutions. Even if the £600k had been raised we would be no further forward and with no more guarantees than we have today.

Many were disappointed because the prospects for a full Judicial Review provided hope. However, as the emotion of disappointment fades over time I think people will realise that a strategy of hope isn’t a good fit for property investors. This is because people like you and me need to feel in control of our own destiny.

So where do we go from here?

Two days after the permissions hearing was declined Property118 made the largest donation to date to Axe The Tenant Tax to date. We hope this will inspire others to commit to contribute to ongoing fundraising. We also wanted to send out a clear signal that we will continue to support positive action to reverse this wicked policy. At the same time though we will continue to help landlords who, like me, want to be in control of their own destiny. This is still possible but there isn’t a one size fits all strategy. For those affected by s24, those of us you who prefer to take control of your own destiny, please see the linked page below …



Tom Andrews

1:53 AM, 14th October 2016
About 4 years ago

@ Mark Shire

"(1) Do you agree with them that S24 will have no effect on house prices?"
I think any effect due to s24 will be immaterial in the context of Brexit, the devaluation of the pound, proposals for mass housebuilding and tightening lending standards. Any one of those will dwarf the limited impact of s24 on the housing market.

"(2) You seem a logical guy, so wondering if you could provide some plausible logic as to why ‘private’ residential property landlords should lose 80% of existing finance cost relief whilst ‘corporate’ residential property landlords should lose 0%?"
The Treasury has been consulting on changes to the tax deductibility of corporate interest expense. Logically, individual residential property landlords are a bigger issue in the income tax landscape than corporate landlords in the corporation tax environment. I fully expect further restrictions on tax deductibility of corporate interest expense in line with OECD Base Erosion Profit Shifting (BEPS) Action 4. It is simply taking longer to implement as multinational group tax is significantly more complex than individual income tax and has to be a co-ordinated international effort.

These proposals are actually mentioned by Grainger in their 2016 Half Year report. They expect the effect to be immaterial although looking at most recent annual report that appears to be more because interest expense is a comparatively small in relation to turnover compared to the average individual BTL landlord.

An economist would point out that the Modigliani–Miller theorem states that the capital structure should not impact the value of a firm and so a firm should not express a preference for equity or debt over the other. In reality, tax deductibility of interest means the value of the firm increases in proportion to the level of debt financing due to the taxes saved. We should therefore expect to see equity funding make a comeback as the tax deductibility of interest is reduced.

@ James Fraser
Tax in excess of 100% accounting profits is not unusual. Indeed, there are many businesses out there with accounting losses but a significant current tax expense. It is not an indicator of the fairness of the system and certainty not grounds for legal challenge.

Paul Halama

15:39 PM, 17th October 2016
About 4 years ago

Not wishing to criticise the commendable efforts of campaigners so far but am I alone in thinking that the slogan of "Axe the Tenant Tax" might be received by the casual observer as a little disingenuous. We are all aware that landlords generally take a sympathetic position when considering tenants and apply a commercially pragmatic stance when it comes to raising rents (better a devil you know...and all that) but making the main thrust of the campaign as a stand to protect tenants seems to me to be an extremely difficult sell in the media and has the danger that we can easily be portrayed as the greedy self-serving landlords pretending to be worried about the tenants - but really - just whingeing about having to pay tax.

Far better I think, especially now that we have had a change of order, to focus on a factual, honest and direct approach to the politicians and the vested business groups, headlining the real legal and policy inequities of section 24 expressed by Mark Alexander and Mr Fickling - that will also - by the way - have huge unintended consequences for tenants.

Mark Shine

19:45 PM, 17th October 2016
About 4 years ago

Reply to the comment left by "Paul Halama" at "17/10/2016 - 15:39":

I personally would not have chosen to use the term 'Tenant Tax'.

But then again I have to admit 'Tenant Tax' is an infinitely more marketable descriptor than my following feeble attempt:

*'Tax for residential landlords who are not the wealthiest as Mr Osborne insinuated, but who are (or will be due to S24) 40% or above tax payers and who also happen to be neither unencumbered nor incorporated, which BTW will almost certainly exert upward pressure on rental costs for ALL tenants'?*

James Fraser

20:20 PM, 17th October 2016
About 4 years ago

Reply to the comment left by "Tom Andrews" at "14/10/2016 - 01:53":

You say there are 'many' businesses with tax bills incurred in accounting losses.

Please explain what they are and how it arises.

Tom Andrews

1:14 AM, 18th October 2016
About 4 years ago

Reply to the comment left by "James Fraser" at "17/10/2016 - 20:20":

@James Fraser

Checking the Companies House data, there are nearly 8,400 companies who reported an accounting loss before tax but still recognsied a tax charge in their most recent accounts. Quite a few household names: Vodafone, Sainsburys, Rio Tinto, RBS, Tata Steel.

E.g. Bristow Aviation Holdings Limited in 2015 had a loss before tax of £34 million but incurred a tax charge of £16.5m.

UK GAAP requires in the notes to the accounts a reconciliation between the total tax charge recognised and the amount calculated by applying the standard rate of UK corporation tax to the profit/loss before tax. Many more profitable companies will have tax charges in excess of the standard tax rate where their taxable profits exceeds their accounting profit before tax. Common reasons include accounting expenses not deductible for tax purposes, impairment expenses and interest on loan relationships.

To be honest, I think the incorporation route offers only short term protection to highly leveraged landlords when we look at the overall political landscape and the other changes on the horizon. It's clear to me that the political support to reverse the s24 or SDLT changes. The only legal argument that would even considered by the courts was tried by Cherie Booth and predictably failed given the extremely high thresholds that must be met when challenging primary legislation.

Sinking further time, energy and money into these efforts simply isn't justified by the likely return. Hence my preferred strategy now is to dispose of properties and use the proceeds to eliminate the LTV on the remaining properties. Properties are going to a mix of leveraged BTLs, cash BTL and owner occupiers.

The tax is paid either way but this way there's still a profit left afterwards and it reduces the exposure of the portfolio to further limits on mortgage financing. It also provides the flexibility to keep long term good tenants in place at current rent and avoid the increased risk of voids caused by raising rents to the levels that would be required by s24 and mortgage ICR requirements.

I've seen too many landlords go bankrupt to risk putting myself in that position. As a businessman, I have always watched which the winds were blowing and adapted to changing markets. That's why I am focusing my energies on new opportunities outside property.

Dr Rosalind Beck

9:04 AM, 18th October 2016
About 4 years ago

Reply to the comment left by "Tom Andrews" at "18/10/2016 - 01:14":

Where is your business based? I don't recognise the ease with which you are able to dispense with your properties and the way in which they are mixed between the 3 types of buyer. I'd like to know more about how you can do this, especially if you have a portfolio as certain prominent lenders won't allow you to simply sell individual properties when you feel like it.
Also, how do you feel about being forced to do this because of a tax imposed on an imaginary profit?

Monty Bodkin

12:29 PM, 18th October 2016
About 4 years ago

Reply to the comment left by "Tom Andrews" at "18/10/2016 - 01:14":

"It also provides the flexibility to keep long term good tenants in place at current rent and avoid the increased risk of voids caused by raising rents"

Charging well below market price for a good product isn't good business.

What are your voids like? Mine have never been so low and I have no problem at all in finding good tenants.

I've phased in an average of 15% rent increases already and expecting to do more. Building up my reserves, giving me the option to deleverage/ buy more/ change market etc should I so choose.

Even if you are not increasing rents to build your reserves, I'm sure there are more deserving causes for the couple of hundred quid you are giving your tenants each month. They won't thank you if you go under from whatever is the next round of landlord bashing.

It is a business not a charity.

James Fraser

21:25 PM, 18th October 2016
About 4 years ago


My rents have always been way below market for existing tenants, and get re-set to market when a house becomes vacant. I like this model because it gives me a genuinely altruistic angle, which I enjoy, whilst making enough money to be worthwhile.

Not any more! My rents went up last April around 13% and they're going up 15% next April. My houses will still be below market and there's huge demand here so I'll be safe for now.

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