Section 24 question? – BTW Osborne I’m not going to give up and sell!

Section 24 question? – BTW Osborne I’m not going to give up and sell!

15:07 PM, 1st February 2022, About 4 months ago 37

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I’d welcome readers’ thoughts on an issue I have discovered with S24 that was not immediately apparent (to me at least) and I am wondering if I (and my accountant) have right or wrong.

In summary: I thought S24 meant I would benefit from a 20% deduction for loan interest. However, this appears not to apply where you have a loss carry forward and your property profits are eating it up:

In greater detail: I had a loss carry forward from pre-2017. During 2017 to 2021 this loss was eaten up by my property profits, artificially inflated by s24. The issue I have is the qualifying loan interest figure put in Box 26 on page UKP 2 of each tax return 2017/18 to 2020/21 has only been the net loan interest figure after applying the 25% (2017/18), 50% (2018/19), 75% (2019/20) and 100% (2020/21) reductions. It would appear there is no way to apply the 20% relief to the interest I paid 2017-2021 but not appearing in Box 26, meaning the interest I paid each year was applied, and my profits artificially inflated, with no tax relief at all, let alone 20%

My accumulated unrelieved interest is now so high (and will only grow in years to come) it will be impossible for my property profits to catch up meaning it seems I am destined to have the 20% relief applied to my property profits and not to the interest I was unable to declare in Box 26 2017 to 2021.

I guess the way I need to look at this is:

1.1 I need to grow my property profits to equal my unrelievable loan interest each year, that way the 20% is applied to a figure which is the same whether loan interest or profits and so is of the same value to me; and

1.2 The 20% tax reduction applied to my property profits (so my property profits are taxed at 25%, not 45%) is the benefit I get for no tax relief being applied to the interest I’ve paid 2017-2021 but which did not appear in Box 26 while my loss carry forward was eaten up.

Welcome any comments. Have I got this right or wrong?

Btw, it’s brilliant to have this chat forum. Over the years I have read superbly helpful comments from so many contributors.

And finally, BTW, Osborne (yes you) if you are reading this, no I’m not going to give up and sell. Carney questioned my financial sense, my risk analysis and my desire to stand on my own two feet to look after myself and my family. How dare he?!! How DARE he?!!

I will sell when I want to, not because you or Carney, or the big real estate build to rent corporates who lobbied you, say I should.

Dobber



Comments

by Mark Alexander

16:05 PM, 1st February 2022, About 4 months ago

There are other alternatives and other questions you and your Accountant appear to have overlooked.

1) Might there be a better ownership structure for you to operate within?

2) Is income tax the only tax that concerns you?

3) What about CGT if you do sell and IHT when you die?

Whilst you're not planning to sell up you are clearly looking for ways to increase you income. On that basis, you may well feel trapped by CGT if you had considered selling lower performing high maintenance properties and reinvesting based on the knowledge and experience you've accumulated over all those years.

The logical way forward is to book a Tax Planning Consultation with Property118. Given that they come with a GUARANTEE of total satisfaction or a full refund, what have you got to lose?

by Alex

16:28 PM, 1st February 2022, About 4 months ago

Hi Dobber

There are things you could consider doing to turn this situation around. However, the most obvious one that springs to mind is to incorporate your property business into a limited company and to carry your rental losses into the company under S86 Income Tax Act 2007. That way, your company will be able to claim all the finance costs as a tax-deductible expense, plus the company can use up the rental losses carried forward.

If circumstances allow, some of your unencumbered equity could also be converted into a Directors Loan at the point of incorporation and you might well end up in an amazing win-win situation whereby your company is declaring lower profits by using up the rental losses and then you are able to draw those profits down against your Directors Loan Account. What a double whammy tax saving and a gratifying opportunity to extend two digits skywards to the Right Honorable George Osborne!

It sounds like you could really benefit from a Property118 Tax Consultation >> https://www.property118.com/tax/book-a-consultation/.

by Katy Ann

20:51 PM, 1st February 2022, About 4 months ago

Reply to the comment left by Alex at 01/02/2022 - 16:28
Section 86 Income Tax Act applies to trading losses, not to property rental losses. Rental activity isn’t a trade for tax purposes, usually.

by Alex

21:00 PM, 1st February 2022, About 4 months ago

Hi Katy Ann

S86 Income Tax Act 2007 paragraph 6 states "This section applies to businesses which are not trades as it applies to trades".

https://www.legislation.gov.uk/ukpga/2007/3/section/86#:~:text=This%20section%20applies%20to%20businesses%20which%20are%20not%20trades%20as%20it%20applies%20to%20trades

Rental losses are classed as "trade losses" for the purposes of the Act and of the relief. This is separate and distinct from the classification of rental income as 'non-trade' income for other purposes.

by Caroline Nicholls

9:49 AM, 2nd February 2022, About 4 months ago

Reply to the comment left by Mark Alexander at 01/02/2022 - 16:05
Thank you Dobber for posting and to Mark for the response. I am in a similar situation an have had historic losses going forward of over £100k which were slowly reducing and absorbing my profits - have 4 buy to let properties. I clearly need to book a consultation too!

by Mark Alexander

9:55 AM, 2nd February 2022, About 4 months ago

Reply to the comment left by Caroline Nicholls at 02/02/2022 - 09:49
Hi Caroline

I'm sure one of our tax team will be delighted to assist 🙂

We look forward to meeting you.

by Adrian Alderton

10:34 AM, 2nd February 2022, About 4 months ago

Dobber, please note I am not an accountant and there are many astute financial guys on the site like Mark. I have however been hit with similar issues in the past when carrying forward a loss. This impacts on your 20% tax relief and soon eats away your c/f loss.
Also last year I got financially smashed by covid (that’s another long story) and my partner and my incomes were below the level of our interest costs. We did not therefore get 20% relief on the full finance costs just our levels of taxable income. So again losing out financially.
In short S24 - 20% tax relief is paid on the LESSER of
- Mortgage interest cost (Finance costs)
- Property Profit (excluding Finance costs as an expense)
- Taxable Income as a whole.
Also with incorporation its is more costly to run but more importantly you need to be clear on whether you will require income from the Company as that’s where it can gets costly in tax terms.
Hope this helps.
Adrian

by Alex

11:32 AM, 2nd February 2022, About 4 months ago

Reply to the comment left by Caroline Nicholls at 02/02/2022 - 09:49
Hi Caroline

Yes, we would be pleased to help you 🙂

https://www.property118.com/tax/book-a-consultation/.

by Simon

12:01 PM, 2nd February 2022, About 4 months ago

Why are landlords not using Ltd company’s. It’s beyond belief.

by John Mac

12:39 PM, 2nd February 2022, About 4 months ago

Reply to the comment left by Simon at 02/02/2022 - 12:01
Because Tax is Personal & everybody is different, you can't simply lump every LL into the same category (Tax Wise).

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