Section-24 and its effects
The controversial Section 24 tax relief changes for buy-to-lets are causing a stir among many landlords, while many remain in the dark about what the changes are and how they will be affected.
The income tax relief that landlords can claim on their buy-to-let properties’ mortgage payments is being overhauled by Section 24 of the Finance Act, a measure which was first announced in the Budget back in 2015. The changes, which mean that landlords will no longer be able to claim a reduction on their income tax payments by offsetting the mortgage interest costs, are being phased in over three stages.
As of April 2017, landlords can only claim back 75% of their financing costs – which will apply when they file their January 2019 tax returns – and the amount will reduce to zero from April 2020, to be replaced by a tax credit equivalent at the basic rate of tax (currently 20%), meaning many landlords’ tax bills could increase.
However, according to research from Kent Reliance, 15% of buy-to-let landlords do not understand the Section 24 changes and are not planning on taking any action to counteract the effects.
What Can Landlords Do?
One way of getting around the tax relief reduction is for landlords to set up limited companies through which to operate their properties. This route has become increasingly popular recently, with a fifth of landlords (19%) already operating through a limited company and a sixth (13%) planning to do so in the future, according to Kent Reliance.
If the investment property is owned by a limited company, it means that mortgage interest payments are treated as a business expense and can therefore still be offset against profits – and corporation taxes on profits are currently 19%, which is lower than income tax. Last year, Kent Reliance reported that 70% of buy-to-let applications for purchase were done through a limited company, compared to 45% in 2016.
Transferring ownership of the property to a spouse is another option that could help some landlords to balance the effects of the tax change.
Adrian Molony, sales and marketing director at OneSavings Bank, said: “Many landlords have sought to move to a limited company structure, or transferred ownership to a spouse but it’s not a one-size-fits-all solution so it’s vital that landlords affected seek professional tax advice.”
Are Limited Companies Always the Answer?
The research from Kent Reliance found that 58% of smaller landlords (those with one to five properties) did not believe they would benefit from either of the above measures, compared to 27% of large landlords (those with more than 20 properties).
One of the downsides for some landlords switching investment properties from personal ownership to limited companies is that, according to Love Money, the transaction would be viewed as a sale and purchase, meaning stamp duty and capital gains tax could apply.
Borrowing for limited company buy-to-lets is also generally more expensive and can be harder to obtain compared to standard buy-to-lets, and the associated costs involved with setting up and running a limited company in the first place must also be considered by any landlord thinking of making the switch.
Rising Rents Could Be A Side-Effect
In a study conducted by the Residential Landlords Association (RLA) which surveyed 3,300 landlords, 70% of respondents said that the mortgage interest relief changes would reduce their profitability – and of that amount, 62% believed Section 24 would diminish their profitability by 20% or more.
Most landlords surveyed (67%) said that they planned to put rents up in order to cover their extra costs, while 25% were thinking of selling properties to reduce their borrowing, and a further 25% intended to leave the sector completely as a result of the changes. The knock-on effects mean many tenants could see rents pushed higher, while the availability of rental properties could decrease over the coming months and years as the regulation takes effect.
While every landlord will be affected to different degrees by the new rules, it is vital that everyone in the buy-to-let industry is aware of and fully understands what Section 24 will mean for them.
Year-end tax planning can be a complex undertaking. Starting early ensures you are in a good position to achieve your tax saving goals.
There are many tax reliefs and allowances available for individuals, families, and company owners. In our personal tax planning guide, we’ve covered some of the allowances you should consider making use of before the end of the tax year and some areas to bear in mind in your longer term financial planning for you, your family and your business.
We have summarised the areas you need to consider and action before 5 April 2019 in below, as well as other areas to bear in mind for you longer term planning.
1.0 Your Allowances
Tax allowances for individuals are normally used within the tax year or lost. Often the allowances are overlooked because in isolation they are small, but utilised together, especially in a family scenario, they can generate real tax savings.
2.0 Scottish Taxes
The main taxes that are likely to affect you as an individual are the Scottish Rate of Income Tax (SRIT) and Land and Buildings Transaction Tax (LBTT). If you’re a business owner it’s important to consider the most tax efficient way to draw a salary from your business. LBTT is a complex area but there can be ways to mitigate the cost to you.
3.0 Charitable Giving
Charitable giving can be an effective way to manage your taxes. Taxpayers who Gift Aid effectively have a bigger slice of income taxed at basic rate.
4.0 Selling Your Property
Restrictions to Lettings Relief is coming into force in April 2020. If you are considering sell your former main residence in the future, it may be wise to consider doing this sooner.
5.0 Domicile Changes
if you’re going to become deemed a UK resident by April, it’s important to review your taxes before then as there may be tax planning opportunities.
6.0 Pension Planning
Scottish taxpayers have different income tax rates from other UK taxpayers, but can save tax by making pension contributions. Make sure you use your annual pension allowance before 5 April 2019!
There are a range of investments options that might appeal to you if you are impacted by the the lifetime, annual or tapered annual pension allowances.
8.0 Making Tax Digital
Whilst MTD is not expected to become mandatory for VAT registered businesses with a turnover below the threshold before 2020, it is advisable that all businesses, trusts and landlords, evaluate their situation now.
9.0 Selling Your Business
As a business owner, when the time comes, it’s important to plan the exit strategy for you and any other owners to ensure you do so in the most tax efficient way.
Got A Question
If you are looking to action any of these tips in our guide or if have any other queries about tax and planning your finances for your future, our Private Client Tax team are here to help. Get in touch with a member of the team for an initial chat now.
How Can Churchill Tax Help?
We provide expert advice and support to individuals and businesses purchasing residential property in Scotland. We advise clients on the LBTT liabilities that arise upon purchase, and how to mitigate these liabilities whilst ensuring full compliance with the Scottish tax rules.
For new clients, we specialise in critically examining their recent residential property purchases to establish whether they paid the correct amount of LBTT under the four different charging regimes that now apply to properties. Where we conclude that an incorrect amount was paid we then advise our clients on the actions that may be taken to remedy the position with Revenue Scotland, including the recovery of overpaid land tax within the short repayment window permitted by the law .
We do not promote nor advocate land tax avoidance schemes. Instead we seek to efficiently plan our clients’ property tax affairs by only utilising government approved statutory tax rules that are contained within the Scottish tax legislation, so that our clients only pay the amount of tax intended by the Scottish parliament.