Section 24 – What’s the big deal?

by Readers Question

8:29 AM, 2nd November 2016
About 2 years ago

Section 24 – What’s the big deal?

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Section 24 – What’s the big deal?

I am a regular reader of Property118 and I find it very useful, especially with the vast amount of useful information that’s made widely available through these forums.head in the sand

I am a BTL investor myself with 9 properties – my credentials are as follows: annual rental income of £65K with finance costs of £18K and maintenance costs of £10K (all my mortgages are on repayment basis and I have another main source of income).

Ever since the section 24 amendment to the Finance Bill was announced, I have been looking at it purely using mental mathematics and scribbled calculations on scraps of papers, but today I modeled it for my circumstances and in reality (for the figures above), I will lose £900 in the tax year 2017-18, £1800 in 2018-19, £2700 in 2019-2020 and £3600 from 2020-21 tax-year onwards.

I appreciate for those with larger portfolios and higher finance costs, there may be a bit more losses with these changes. I don’t want this post to cause any offence, but while it’s a loss – is it really such a big deal??

Comments/challenges will be interesting to read (and learn from)!!

Mervin



Comments

Neil Patterson

8:42 AM, 2nd November 2016
About 2 years ago

Hi Mervyn,

Unfortunately many Landlords have not kept up with developments.

The Government have fundamentally changed the basic principles of how to work out profit/income. Also why would it be impossible that the 20% relief could not be taken away?

You appear to have a proportionally low interest cost base compared to many other portfolios, so yes you are worse off, but many Landlords on the other end of the spectrum will be ruined and are trapped unable to even sell.

You do not mention if you receive other income external to your portfolio. If this has not been taken into account and the rental income added to all your income to assess your tax rate payable your position could be worse than you think.

Neil Patterson

8:48 AM, 2nd November 2016
About 2 years ago

Please also see Dr Rosalind Beck's comprehensive report:

Section 24 of the Finance (No. 2) Act 2015: “the unjust legislation that will make the UK housing crisis much worse.”

Click here >> https://www.property118.com/section-24-comprehensive-report/91755/

Simon Hall

9:21 AM, 2nd November 2016
About 2 years ago

Finance Costs of £18K sounds peanuts for 9 properties...must be bedsits up North (no offence intended) as down South you would be expected to pay roughly for each property based on current prices. Unless you have bought them years ago.

It will be interesting to hear others view from South how much Finance cost on average they pay for each property.

Monty Bodkin

9:49 AM, 2nd November 2016
About 2 years ago

Finance Costs of £18K sounds peanuts for 9 properties…must be bedsits up North

Rental income is £65K which averages out at £600 pcm per property so unlikely to be bedsits.

Mervyn doesn't say what his gearing is.

Sam Addison

10:04 AM, 2nd November 2016
About 2 years ago

Apart from the risks of the 20% relief being discontinued and of interest rate rises, Section 24 is not a big deal for those people who have a low loan/value and are letting in areas where they can get 6%+ return on value.
On the other hand, properties in London yield about 5% return on value and with mortgages at say 4% and 80% loan/value taxing finance costs at 20% would almost certainly wipe out any profits made other than increased capital value.
So for you (and me) who are not highly leveraged there is no immediate problem but as Neil says some landlords will be wiped out! For them it is a very big deal!
Additionally, the government is fundamentally changing one of the most basic Generally Accepted Accounting Principles (GAAP) and applying it to a very small section of the population (landlords) while not applying it to companies or to sole traders/partnerships in other lines of business.
This is obviously unfair.
BTW a friend who works for HMRC tells me GAAP is enshrined in law unless changed by statute.

Sam Addison

10:08 AM, 2nd November 2016
About 2 years ago

Reply to the comment left by "Monty Bodkin" at "02/11/2016 - 09:49":

Looks something like £1m portfolio with 40% loan/value and mortgage at 4.5%

Monty Bodkin

10:40 AM, 2nd November 2016
About 2 years ago

Hello Mervyn,

Run some scenarios through such as 5% pa rent increases, loss of partner.

Interest rate rises, effect on your pensions, effect on CGT.

Consider the implications if you have kids (or may have in future), loss of child tax credit, child benefit, bursaries, university grants/loans.

What if you or your partner work hard, put the effort in and get close to the 45% tax rate?

Your tax bill could easily increase by £10K+.

As Neil points out, by the same 'logic', what is to stop the 20% rate being scrapped. And why should you be able to offset your £10K maintenance costs? After all, owner occupiers can't. Another playing field leveller ahead?

From a left wing perspective, the weakest in society will be hammered hardest by the inevitable increase in rents, you can't downsize or move to a cheaper area when you are already there.

Many landlords are self employed or own other businesses, a tax on business turnover is fundamentally wrong to most right thinking capitalists and sets a very bad precedent.

Monty Bodkin

10:51 AM, 2nd November 2016
About 2 years ago

Reply to the comment left by "Sam Addison" at "02/11/2016 - 10:08":

Probably even lower than that Sam, Mervyn claims they are repayment mortgages.

Mervin SX

10:54 AM, 2nd November 2016
About 2 years ago

Neil, Sam, Monty,

Thanks for taking the time to respond. Yes, the Section 24 amendment is wrong and it may very well be changing fundamentals of GAAP, etc. I think what I am reading from your posts is the fear of further changes such as the scrappage of the 20% tax credit/relief, the future ability to deduct maintenance costs, etc. unless most landlords have a high gearing ratio.

Like most landlords I did panic slightly until I did my own calculations and it's my opinion that if your finance costs are not very high (say, less than 30% of your rental income) then this ridiculous amendment to the Finance Bill shouldn't wreak havoc with your BTL investment - unless your other tax affairs come into play (pushing you into 45% tax brackets, etc.).

Mervin SX

11:00 AM, 2nd November 2016
About 2 years ago

I should have added - the properties are not bedsits. They are houses/apartments in Humberside (1), Essex (2) and Norfolk (6).

It's a £1m portfolio with approx. 60% LTV with mortgage rates ranging from 0.79% to 3.84%. Two of them are on lifetime tracker rates and the rest are on 2-3 year fixed interest rates. Mortgage providers are HSBC and NatWest.

I do have a main source of PAYE income but by utilising my annual pension allowance, I try and stay out of the 45% tax bracket.

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