Section 24 Tax Is Now Hitting Tenants Hard

Section 24 Tax Is Now Hitting Tenants Hard

9:34 AM, 3rd September 2021, About 2 months ago 21

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Rental demand and hence the average price of UK rent is at an all time high and continues to sky-rocket, but why?

Well, we predicted this six years ago when the UK Government first announced the introduction of the Section 24 Tax.

If you don’t know what that is, then you’re probably not a landlord, so please allow us explain.

Section 24 Tax prevents landlords from offsetting their finance costs against profits, but only private landlords. No other types of business in the UK are affected by the Section 24 Tax. In other words, whatever other form of business you might be in, be it car rental or a Dentist, you can still offset your finance costs against your profits.

The problem with the Section 24 Tax is that landlords can end up paying more tax than they actually make in profit after paying their mortgages.

Clearly this isn’t viable, so they have just a few choices:

  1. Sell their rental properties to owner occupiers – a lot have done this, which is one of the reasons for increased demand for rental property
  2. Put the rent up – which is one of the main reasons that rents are now at an all time high
  3. Move their properties into a Limited Company – because they would then no longer be affected by the Section 24 Tax law

You might forgiven for thinking that option 3 is the logical move, but there are problems with that too. Many landlords do not understand how this can be done without having to refinance, pay Capital Gains Tax on moving the properties to another legal entity and paying Stamp Duty on the transfers.

The Tax Consultants at Property118 have helped hundreds of landlords to transfer their properties into Limited Companies, but that’s just scratching the surface. There are over two million properties in the UK Private Rental Sector.

There has been a lot of campaigning about the unfairness of the Section 24 Tax from Landlords, but the Government refuse to back down. They have their counter arguments of course, saying that they are trying to “level the playing field” between homeowners and landlords, but that’s just hogwash. The Government see landlords as a soft target for collecting more tax, probably because UK private landlords have been so demonised by the mainstream media for years now. Sadly, the general public don’t give this too much thought, which is why quality rental property in the UK is now in such high demand and rents are at an all time high and still rising.

So what can be done?

If you are a landlord, the obvious way forward is to book a Tax Planning Consultation with a Property118 Tax Consultant to weigh up your options. However, that does not help tenants. Most landlords will quite rightly look to charge as much rent and make as much profit as they can. Maximising returns is what business and investment is all about of course!

The bottom line is that unless the Government incentivise further investment into the development of more UK rental property, demand and rents will continue to rise as more landlords go with their only other available options to sell their properties to First Time Buyers or put their rents up. One other solution is to drastically reduce the size of the UK population, but I don’t think many people can see that happening any time soon.

The best way to reduce demand is to increase supply.

A good example of this is hotels, where supply exceeds demand. On that basis, prices remain competitive and quality improves as hotel operators compete for business. Therefore, increased supply also improves quality through competition. Additional tax and regulation does the opposite of this.

The only other solution I can think of is for everybody in the UK to buy a home of their own, but that’s just unrealistic. There are a million reasons why some people people prefer to rent or are simply not in a position to buy.

What are your thoughts? Please comment below.

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by Mick Roberts

18:54 PM, 3rd September 2021, About 2 months ago

Reply to the comment left by Binks at 03/09/2021 - 18:01
Some owned outright. Some owned with mortgages.

Yes I know if owned outright, Section 24 no concern for them.

One has said his accountant has mentioned it, but he don't understand it.

I've got one lad who's about buying his 7th house now & I reckon next year he's gonna' be close to the 40% Tax bracket trap. I've told 'em that many times.
All of 'em bar one are working full time jobs as well, so 25k a year plus the houses they gonna' be getting close.

They don't understand it. Yet, I have also got about 15 mates started pensions the last 2 years which they sort of 30% understand with the Tax man giving u money. But getting 'em to take this Section 24 seriously, they ain't getting it.

One of 'em came to see u about 2 years ago in Malta, dinner etc. He does understand the Section 24.

by Mark Alexander

19:04 PM, 3rd September 2021, About 2 months ago

Reply to the comment left by Mick Roberts at 03/09/2021 - 18:54
I think it was me he came to see and yea we are looking after him

by Mick Roberts

19:07 PM, 3rd September 2021, About 2 months ago

Reply to the comment left by Mark Alexander at 03/09/2021 - 19:04Yes he did have dinner with u. And yes say I said About ruddy time. I've been telling him 4 years to get it done sooner rather than later. Especially with his large amount of house as u know. He has similar to me.

Eh & he's very intelligent & understands it. Not as smart as u like in the Tax department ha ha, but he does know his stuff.

by longbow

7:51 AM, 4th September 2021, About 2 months ago

I have 30 properties, 10 in own name, 10 in standard ltd, 10 cash outright in another ltd. I’ve not done tax planning yet. It’s something I really want to do. Anyway… I’ve spoke to LOADS of landlords around me, and NONE know about s24, simply because they are business owners, who have purchased 1 or 2 property as an investment, and leave all the daily work to an agency, and the money they see each month to their accountant. So what they see is “what they get”. They have not noticed s24 making any change to their income. I doubt they know if they make a profit, as they see anything the property makes as such additional to their business income.

by Lorraine Mansfield

8:59 AM, 4th September 2021, About 2 months ago

I was told by a few landlords they don't declare their rental properties that have no mortgages on them. Surley these landlords would notice the increased tax bill by now. I also know of a couple of landlords who HMRC discovered through tenancy deposit schemes and tracked them down that way. One had to pay £7,500 immediately they claimed they didn't know.

by Andrew Milner

9:02 AM, 4th September 2021, About 2 months ago

There is a fourth option available if you have the right sort of property in the right location - let as a furnished holiday let which is (for some reason) treated as a business

All interest is deductible even if the property is owned in personal names and profits can be shared between spouses to minimise tax

by Mark Alexander

10:37 AM, 4th September 2021, About 2 months ago

Reply to the comment left by Andrew Milner at 04/09/2021 - 09:02
Hi Andrew

You are absolutely right, and that's also added to the demand for longer term rentals in those locations where landords have chosen to adopt that strategy. This is just another example of Government not thinking through the consequences of their decisions. In the same way and water will find the easiest way to flow, landlords will find the easiest way to make profits.

by Martin S

11:22 AM, 4th September 2021, About 2 months ago

As many know already, and as Andrew points out above, going the Holiday Let route is certainly preferable, at least for the time being, if the right property crops up, and this is the route I'm taking at present. Buying any additional BTL's seems like a no brainer at present.

As for the cottage we're buying, the owner died, and the family selling, and so the long term tenant has been given their Section 21 Notice, and will be out by October. We can then rent out as a holiday let, using our own website. This will mean one less property available to rent, in an area (Our home town) which I know is desperate for rental properties, and it never ceases to amaze me when looking at Rightmove, how few places are coming onto the rental market.

We have friends who have been renting the same lovely place for 25+ years, but I suspect the potential EPC problems ahead (Property 200/250 years old) means that the owner is selling up to a private owner, and they have been given their Section 21 Notice. They are finding it near impossible to find another place to rent, and have met the same people looking whenever they have managed to get a viewing. The chickens have definitely come home to roost.

by Giles Church

13:02 PM, 4th September 2021, About 2 months ago

Unfortunately any incentives from the Government are likely to go to Lloyds bank and the like to establish their 10,000 property portfolio.
I’ve had your assessment Mark and was border line but maybe I need to let you have a look again even if it’s just for the inheritance tax aspect

by Mark Alexander

16:13 PM, 4th September 2021, About 2 months ago

Reply to the comment left by Giles Church at 04/09/2021 - 13:02
Happy to do so Giles, no extra charge. Just email me and I will send you a link to book a video conference when I’m next at my desk

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