In April 2017, the UK government introduced a tax change that would gradually phase out the ability for landlords to deduct their mortgage interest payments from their rental income before calculating their tax liability. This change, known as Section 24 or the ‘Tenant Tax,’ was designed to make the buy-to-let market less attractive to landlords and help first-time buyers get on the property ladder. However, the implementation of Section 24 has caused significant financial strain for many landlords, especially those owning property in their own name.
Under the previous tax system, landlords were able to deduct their mortgage interest payments from their rental income, which reduced their taxable income and, in turn, their tax liability. However, under Section 24, landlords are no longer able to deduct all of their mortgage interest payments from their rental income. Instead, they receive a tax credit worth 20% of their mortgage interest payments. This means that many landlords are now paying significantly more tax on their rental income.
The impact of Section 24 has been felt most acutely by landlords who own property in their own name. This is because landlords who own property through a limited company are not subject to the same restrictions on mortgage interest relief. Instead, they are able to deduct their mortgage interest payments from their rental income as a business expense, which reduces their corporation tax liability.
The effect of Section 24 has been compounded by a number of other changes to the tax system, including the introduction of a 3% stamp duty surcharge on second homes and buy-to-let properties. These changes have made it increasingly difficult for landlords to make a profit from their rental properties, especially in areas where rental yields are low.
As a result, many landlords have been forced to increase their rents to cover the additional costs associated with Section 24 and other tax changes. This has led to a significant increase in rental prices in some areas, which has put further strain on tenants who are already struggling to afford their housing costs.
Landlords who are feeling the impact of Section 24 are left with few options. They can try to increase their rental income to cover the additional tax costs, but this may not be possible in areas where rental prices are already high. They can also try to sell their properties, but this may be difficult in areas where the property market is stagnant. Those deciding to sell their properties may decide to do so sooner rather than later in order to take advantage of the current Capital Gains Tax allowances before they are reduced in the next tax year.
Some landlords have opted to transfer their properties to a limited company to take advantage of the more favourable tax treatment. However, this option is not suitable for all landlords, as it brings additional responsibility in managing a limited company, and there may be additional tax costs associated with transferring ownership of the property.
Others have chosen to incorporate their property portfolios into a limited liability partnership (LLP), which allows them to retain ownership of the property but still take advantage of the more favourable tax treatment. However, this option is also complex and may not be suitable for all landlords.
Overall, Section 24 has had a significant impact on the buy-to-let market and the landlords who operate within it. Landlords owning property in their own name have been hit particularly hard, and many have been forced to make difficult decisions about the future of their investments. The changes to the tax system have made it more difficult for landlords to make a profit from their rental properties, which has led to an increase in rental prices and a strain on tenants who are already struggling to afford their housing costs. Those people who need to rent are looking at increased rental prices due to the diminishing supply of privately owned rental stock pushing up prices as demand outstrips supply.
One thing is for sure – whatever the outcome – it is clear that whenever the Government interfere in the private housing market, however well meaning always cause a raft of unintended consequences.