Section 24 Tax Planning

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Solutions for landlords with a Section 24 tax problem.

First though, let’s take a look at what Section 24 tax is and why it’s so unfair.

The following Case Study explains why so many property rental business owners are considering incorporation, by comparing the tax position of a private landlord vs that of a private hotelier.

Let’s assume that both businesses own assets worth £2,000,000 and have 75% LTV mortgages secured on them at an interest rate of 5%. In other words, their annual finance cost bill is £75,000.

Now let’s assume that both businesses make profits after finance costs and all other expenses of £50,000.

The hotelier will pay £7,500 of income tax. This is broken down as follows; £nil on his first £12,500 of net profit and 20% tax on the next £37,500.

However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500. This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band.  Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500. The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.

To summarise, the private landlord pays more nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.

HOWEVER, if both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.

There are, of course, many other reasons for private rental property businesses to consider incorporation. These might include the following:-

  • Since the Prudential Regulation Authority changed the rules on buy-to-let mortgage affordability criteria, Limited Companies can borrow significantly more than private landlords based on rental income calculations.
  • There are far more opportunities for property company owners to accrue future capital appreciation of property outside of their personal estates for inheritance tax planning purposes.
  • You may be able to structure your finances in such a way that you do not need to declare taxable dividend income.
  • If you live outside the UK the ability to be able to structure your finances to enable you to withdraw capital from your company tax free are significantly enhanced.
  • If you decide to live in Portugal you may be able to take dividends out of your company without paying income tax in either Portugal or the UK for up to 10 years.

It would be remiss of us not to point out that incorporation is not a ‘one-size-fits-all’ strategy. In fact, we only recommend it to around 1 in 10 landlords who book landlord tax planning consultations with us. There are several alternatives, especially if you have relatives who are not higher rate tax payers and you are considering business continuity and legacy planning as well as your income tax position.

Book a Tax Planning Consultation

Consultations include Fact Find, expert analysis and a recorded video conference with your Property118 Consultant and your Accountant. Thereafter, our recommendations will be reviewed by Cotswold Barristers (at no extra charge). If they agree, and if you instruct them to complete the legal work to implement our suggestions, Cotswold Barristers will adopt our recommendations as their own professional advice, for which they carry professional indemnity insurance of £10,000,000 per claim. All consultations are confidential and you will be provided with a copy of the recording of the video conference. We GUARANTEE total satisfaction or a full refund.
  • Please provide an overview of your circumstances and what you are looking to achieve.
  • Property118 is unique in terms of offering tax planning consultations for a fixed fee of £400 with a guarantee of total satisfaction or a full refund.
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