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Everything a Landlord in the UK Need to Know about Section 24

A property owner in the UK or a buy-to-let landlord in London should be cognizant of Section 24 tax legislation of HMRC. What could be the tax implications of it is very significant for property owners. But, some property managers or individual landlords need to know a lot when it comes to this amendment to HMRC tax law. Not being aware of this new regulation calls for an uncomfortable surprise when they submit tax returns.

GoRings, as accountants and tax experts for buy-to-let landlords, are always aware of the latest legislation, regulations, including Section 24. The industry specialists also call it the ‘Tenant Tax.’ We also understand what profound implications this has for our valued clients. This blog will provide a comprehensive idea about the tax, its effects, and how to stay in the profit area through informed decisions from experts like GoRings Accountants.

What is the HMRC Amendment of Tax Regulation Section 24?

HMRC made an amendment in the UK’s tax law, and it’s widely known as Section 24. It applies to revenue on built-up housing rental real estate. The new regulation simply means that house owners may not claim as much tax deduction benefit as they could before April 2020.

Now, a property manager or landlord will need to pay tax on all the rental income they accept. The house owner can then claim a refund of bank loan interest costs but up to a ceiling of 20%.

In a nutshell, it refers that real estate investors now pay more tax proactively than saving through deductions. Additionally, if the investor is also in another job and gets a regular salary, this could promote the landlord to the next higher tax band. Such a tax band elevation has the potential of increasing the amount of final tax obligation.

Which Tax Payer Section will get Affected due to this Amendment?

Section 24 will affect certain landlords. Hence, it is very prudent that all real estate investors get a clear idea of whether they are governed by this amendment or not. When a landlord owns a property that they are renting out, and there are no mortgage costs towards that property, then such a scenario is exempted from Section 24. But, Section 24 will impact those if they have a mortgage and satisfy any of the followings:

  1. UK citizen residing in the UK and owns residential rental property anywhere in the world
  2. Non-UK resident but has housing rental real estate in the UK
  3. Trusts and partnerships that own housing rental properties

The direct effect of Section 24 will be seen by those who fall into the topmost tax brackets of 40% and 45%. After the implementation of this regulation, they will pay more tax upfront.

House owners in the 20% HMRC tax bracket may also be liable to pay more tax if their total profit (a mixture of their rental incomes with other profits) going beyond £45,000.

But, such an impact on your tax obligation is always on a case-to-case basis. It is smart to seek expert advice from a professional firm like GoRings Accountants.

What is the Rationale for Implementation of Such an Amendment?

The assessment behind Section 24 is to help new home buyers get on the real estate regime, as well as inspire landlords to become certified businesses. The UK government incorporated a few alterations that discouraged competition between property owners and property investors; one is the 3% stamp duty surcharge on extra properties and the other being HMRC tax regulation through Section 24.

What does Section 24 Mean for your Income and Tax Liabilities?

The consequence of Section 24 on landlord’s income will rely on which tax bracket they fall into for low-income group individuals, the effect will be negligible. For real estate owners with large portfolios, the outcome could be a significant increase in tax obligations.

An example:

  • You can claim tax relief on your mortgage interest from the rental profit, so only paying tax on £10,000.
  • Basic rate individuals pay £2,000. Higher rate landlords pay £4,000.

As noticed from above, nominal rate taxpayers see no alteration as they can claim a refund for the 20% higher tax rate landlords will need to pay an additional £1,000 in taxes. With increasing holdings, tax liabilities will increase.

Which Costs are Barred from Deduction Under Section 24 in Tax Returns?

Bank loan interest is the main expense that can no longer be deducted from a tax return, but there are others, such as:

  • Fees and charges linked to settling a loan account early
  • Mortgage management and execution fees
  • Interest payable on bank loans taken out to renew or recondition a house

What is the Current Market Effect of Section 24 Implementation?

The private house rental marketplace has slowed down lately. Recent surveys suggest that many small house owners have either exit the PRS or are seeing it as an option. Data from a reputed real estate agency published at the end of 2020 discovered that more than 100k house owners had left the market since 2017.

How to off-set and Manage Section 24 Amendment Implemented by HMRC?

Section 24 tax relief regulation amendments apply to most of the landlords, but there are ways to alleviate the effects, for example:

    1. Assess house rental operational costs:
      Minimize property maintenance costs is the fastest and easiest way to claw back cash lost through a higher tax bracket. Landlords could manage the real estate themselves instead of hiring a property management agency.
    2. Refinance the Existing Mortgage:
      Reviewing your complete bank loan costs and then look for a more inexpensive loan can help minimize the influence of Section 24.
    3. Transform to Commercial House Rental Portfolio:
      Section 24 is currently applicable to residential property owners. The existing landlord may switch their investments to commercial real estate to stay out of the tax regulation.
    4. Ownership Transfer or Profit Distribution:
      If there is a lower-income family member or partner, split the rental income to stay below the higher tax level. Landlords may also transfer properties to a family member to level out the final tax obligation.
    5. Establish a Limited Company:
      Transforming existing rental operations into a limited company will enable you to stay out of Section 24 tax legislation. But, keep in the calculation that your business will then be subject to corporation tax and capital gains tax.
    6. Establish a Beneficial Interest Company Trust:
      This lets you handover your portfolio into a company so that you stay out of the tax changes while upholding personal possession of the real estate. There will be no requirement to refinance the existing loan. You can get in touch with GoRings Accountants in the UK to discuss such options.
    7. Restructure Rent and Increase:
      This might make up for the increased tax obligation, but a fine balancing is required because you’ll need to avoid sliding into the next upper tax band.
    8. Decrease Real Estate Holdings:
      Rationalizing your investments and trading poor-performing real estate can decrease tax obligation substantially.
    9. Sell your Real Estates:
      Some real estate managers or owners also find selling as another option. You need to carefully gauge the house rental business in your city. Experienced landlords suggest that speaking to professionals like GoRings Accountants could help you in this situation.

If you choose to streamline or sell your real estate totally, a Section 21 notification can make it clear that you will not be entering the tenancy agreement again after the existing contract ends.

What are the Recent Movements after April 2020?

Throughout the last application stage, which occurs during the tax year of 2020/21, one hundred percent of bank loan interest is charged at the rudimentary rate, with the tax aid on mortgage interest limited at 20%. Therefore, section 24 will be completely applied after April 2020, and it’s possible that some house owners (especially those in the higher tax bands) will be paying more tax than the net profits they obtain.

So far, you got an overall idea about the challenges and hurdles that Section 24 brings with it, but will there be any chances that landlords can gain an advantage from it?

For example, Section 24 may aid landlords to lastly take that step to expand their portfolios in different segments. With the option to invest in commercial real estate as well as holiday house rentals, investors may see an improvement in net profit. By trying to stay out of Section 24 tax rulings, buy-to-let property owners may also eventually decide to incorporate their rental operation and turn out to be the director of their own limited company. Such an endeavor can offer advantages from different perspectives.

While this option can deliver a little comfort to some, mainly those with larger holdings, it’s feasible that, moving forward, house owners with a smaller number of real estates will either not feel any influence of the tax ruling or will have the opportunity to benefit from a diverse business model.

  • Contact GoRings Accountants to Protect your Investment Earnings from Financial Loss
  • GoRings Accountants is a unique and dedicated technology-driven accountancy, taxation, and financial consultancy service supplier in the UK. Landlords in the UK may rely on tailored services provided by the firm to minimize tax obligation and save more.
  • The company also offers dedicated tax and accountancy specialists along with cloud-based software access.
  • To comply with the new HMRC amendment of Section 24 tax legislation and avoid any unnecessary penalties, GoRings Accountants is your trusted partner.