Section 24 and Tenant Fees Ban
In recent years, the Government’s aim to limit small scale landlords and bring transparency to the letting market has lead to significant changes in taxation.
Section 24 that has already reached the midway of gradually restricting relief for finance costs on residential properties to the basic rate of Income Tax is still blurry to a number of landlords.
At the same time, those who want to rent a property are relieved, as the Tenant Fees Ban that will come in power in June 2019 will make the rent contracts much cheaper.
Having in mind that for landlords the changes in taxation might lead to a dramatic decrease in rental income, it is important to figure out how these new Government’s measures are designed.
So what is Section 24 and do all landlords have to be concerned about the changes that its full implementation will bring?
Section 24 of the Finance Act, otherwise known as the Tenants Tax, means that in 2020 mortgage interest will no longer be deductible when calculating landlord’s rental profits.
To some this gradually executed change will make no difference, while landlords in the higher rate tax bracket of 40% will be hit hard.
During the development phase of Section 24, the estimates were that 1 in 5 individual landlords would receive less relief as a result of this measure.
As of April 2019, landlords can only claim 25% of their financing costs – which will apply when they file their January 2021 tax returns.
From being able to offset 75% for the 2017/18 Tax Year to zero in 2020, buy-to-let landlords need to adjust their rent contracts and develop a clear business plan in order not to lose profits of their properties.
Even though Section 24 was announced in 2015, the transitional 4 years period was initiated to give landlords time to adjust to these changes.
One of the main aspects of Section 24 is changes in how profits are calculated.
Before Section 24, when assessing their profits landlords could automatically claim a percentage of wear and tear, as it was possible to class things like maintenance and decoration as an ongoing expense.
With the current regulation, such costs have to be documented, allowing landlords only claim for the work they had done on the properties, and not for devaluation due to use.
To make the taxation assessment easy, Reneza has prepared a Section 24 calculator that will outline how much of a landlord’s rental income will be taxable each year up until 2020/2021. As Section 24 is phased out across 4 years, there are three options, which show a variety of impacts that disappearance of mortgage interest relief will have on landlord tax.
According to the UK government, Section 24 was initiated to ensure that landlords with higher incomes no longer receive the most generous tax treatment. In other words, the measure encourages landlords to become professional property businesses to improve the stability and profitability of the sector, eventually benefiting landlords and tenants alike.
Some ways to avoid revenue loss when Section 24 is fully implemented
Despite the good intentions that brought Section 24 into play, a number of landlords are unwilling to establish property business because of the risks and stamp duty as well as capital gains taxes that would apply when switching to limited companies. Luckily, there are some ways to avoid revenue loss when Section 24 is fully implemented. Among means to save the profits are options like remortgaging, dividing profits or investing in commercial property. Each of those measures has its downsides. Therefore, many of the landlords choose to charge more rent to offset the loss (while staying in the lower tax bracket). However, charging more rent may not always be the right solution and it can lead to more void period for your property, which eventually may result in even more loss.
Usually, landlords trust letting agencies when it comes to finding tenants willing to pay the increased rent. However, now the landlords will have to take into consideration yet one more obstacle – the Tenant Fees Ban, which means that 20% of the letting agencies’ turnover that was previously earned by charging tenants for administering their contract will be cut off. In letting market, this means higher commissions on landlords to compensate for the loss.
What should landlords do to avoid negative effects of Section 24 and the increased letting agency commissions?
Trusting an online letting agency rather than a traditional agent to find tenants and manage properties might be a safe way to ensure property profitability these days. Reneza, as opposed to traditional letting agents, does not rely on tenants charges and therefore can offer free tenants find without upfront fees, alongside with the transparent full property management. Moreover, Reneza automates a lot of real estate manual work, plus they are using economy sharing principles. This allows to save thousands in wages, therefore allows landlords to save thousands in fees.
Alongside section 24, there are other announcements which as a landlord you have to consider. Aside from tax, there are other regulation implementations for homeowners like new energy efficiency measures. All renewed or new tenancies after April have to carry out E rating on the energy performance certificate. Furthermore, landlords can expect even more shifts and changes throughout this financial tax year. For more information regarding other financial responsibilities if you rent out a property, click here.