Section 24 Tax Is Now Hitting Tenants Hard

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.

Share This Article