Section 24

What you need to know​

Commencing 6 April 2017, a residential landlord with a personal rental property, will be unable to deduct any financial costs, ie. interest on the buy to let mortgage and any other associated mortgage loans and fees when working out taxable profit.  

As a result, there will only be a basic rate reduction in these costs from your income tax liability. This has a considerable impact on potential revenue.  The basic rate income landlord must now assess whether the changes might push them into the higher rate tax bracket.  

Is it more beneficial to hold my property portfolio in a Limited Company?

The ‘penalty’ of Section 24 won’t apply if you own your property portfolio within a limited company.  Corporation tax will be paid instead of income tax.
This might work well for a higher (40%) rate income tax-payer but not necessarily for an additional (45%) rate tax-paying landlord.
Furthermore, you cannot simply move your current portfolio into a limited company.  Stamp duty and Capital Gains Tax will apply, along with other costs.

How Section 24 works

Below is a simplistic ‘before’ and ‘after’ example for a higher (40%) rate income tax paying landlord who personally owns a property valued at £250,000 with a buy to let mortgage of £187,500 (75% LTV), receiving rent of £1,200 pcm.


That equates to over a 38% drop in profit!

NOTE: this is a very basic example – only relating to the mortgage interest. It does not include any other income that you may have earned or any other costs that you might have incurred.

What can landlords do to ease the situation?

You may have been told that landlords owning their portfolio of rental properties through a limited company is a more tax-efficient option.  They pay corporation tax instead of personal tax and so Section 24 does not apply.

Could this be a better choice? Compare how the higher tax rate paying landlord, as above, might have less tax to pay if they owned the property in a limited company.

 

A Limited Company shows an improved outcome when comparing before and after.

BEFORE: In tax year 2016/17, the landlord makes £1,567.20 more net profit than if he were paying income tax.

AFTER: In tax year 2020/21, the landlord makes £3,172.12 more net profit than if he were paying income tax.

The example above relates to a higher rate (40%) income tax paying landlord. Additional rate (45%) income tax paying landlords may discover that they are even worse off. Also, be careful if you are a basic rate tax paying landlord. You might find that the taxable income calculation pushes you into a higher tax bracket.

Can I transfer my property portfolio into a SPV limited company?

Yes it is possible, but comes with some serious challenges. The properties have to be sold at market value and will attract additional costs.

Stamp Duty

3% will be payable on the purchase by the limited company.

Capital Gains Tax

Capital Gains Tax is personally due when the property is sold

Early Repayment Charges

ERCs may be applicable on your existing buy to let mortgage

Corporation Tax 

payable both on rental income and the property sale

Finance Charges

will be sustained by the limited company when taking out a new buy to let mortgage.

Profit Extraction

in a company, the rental income (after corporation tax is paid) would belong to the company. The shareholder would need to extract it ‘out’ of the company, if required, for personal use.  This would normally be achieved by way of a ‘dividend’. As of 6 April 2018, the first £2,000 of dividends are tax-free, with anything above this amount liable to income tax at 7.5%, 32.5% or 38.1%.

It is essential to take qualified legal and financial advice when considering any such option.  

 

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