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Mortgage interest tax relief for landlords

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Mortgage interest tax relief for landlords is gone; here’s how you can get it back

A surprisingly large number of investment property owners are still unaware of the dreaded ‘Section 24’ tax changes; and what those changes will mean for their profits going forward. Are you one of them? Here’s what you need to know about the changes to mortgage interest tax relief; and how you can regain access to the tax savings if you know what to do…

Note: this article does not constitute legal advice or tax advice. If you need help with your property investment tax, get in touch with our team on 0208 090 2604 or email info@gnsassociates.co.uk.

Section 24 explained

Section 24 was announced back in the Summer 2015 Budget, and was slowly phased in over a period of four years from 2017 to 2020. 

In a nutshell, it means that landlords’ tax bills are now more expensive; and it’s all down to mortgage interest tax relief.

Before 2017, if you were paying a mortgage on a residential buy-to-let property, you could subtract 100% of your mortgage interest costs from your taxable income; thereby saving yourself a significant chunk off of your tax bill.

Then in 2017, the rules changed; you could now offset only 75% of your mortgage interest costs.

That percentage shrank again to 50% in 2018, then 25% in 2019. 

Since April 2020, you can no longer offset any of your mortgage interest costs from your tax liabilities. Instead, you can only claim a basic 20% tax credit.

And worse still, this loss of relief also applies to other buy-to-let expenses; including property refurbishment loan repayments and mortgage admin fees.

What does this mean for landlords’ tax costs?

For higher rate taxpayers and additional-rate taxpayers, Section 24 represents a significant dent in the kinds of returns they can expect from their buy-to-let portfolios. You may find yourself paying more than double the tax you were paying before the changes.

And before basic-rate taxpayers can breathe a sigh of relief, remember; the income used to pay your mortgage interest (and other costs which no longer count as allowable expenses after Section 24) will now need to be reported on your tax return. 

You might therefore find yourself forced into a higher tax band, particularly if you already have multiple income streams from both your portfolio and a full-time job. 

For basic-rate taxpayers being pushed into the higher-rate band, that means an extra 20% of tax on any income over the higher-rate threshold.

What can investors do about the loss of mortgage interest tax relief?

Should exit the property investment market due to Section 24? 

Many investors have found themselves with no other option than to sell off their portfolios altogether; but depending on your circumstances, there are other Section 24-beating strategies that might work out for you.

Here’s just a few.

Hiking up rent

This might seem like the obvious solution, but it has its drawbacks. 

For one, increasing your rental income may push you into a higher income tax band; leaving you paying out even more in tax. Your tenants may also be unhappy or simply unable to pay the increased rent; and if they move out, the higher rental costs will make your property less attractive to new tenants.

Downsize your portfolio

The fewer properties you have, the fewer mortgage costs you’ll have and the less you’ll be taxed for your portfolio. 

Unfortunately, that also means smaller profits. Minimizing your portfolio is certainly a viable tactic for sidestepping Section 24, but we can do better.

Switch to a commercial property portfolio

Section 24 only applies to residential properties. Commercial properties (such as offices, retail stores and warehouses) are exempt from the mortgage interest tax relief changes.

Of course, upending and replacing a residential portfolio in go isn’t exactly practical; but property investment has always been a long game, and gradually shifting to a more commercial-focused property investment strategy might be the solution you’re after.

Partnership incorporation

If you’ve been running your property investment activities with your partner, you may be able to incorporate your partnership to sidestep Section 24.

Property partnerships can also access full relief from capital gains tax and stamp duty land tax; but getting the partnership right to qualify for these savings is a long and difficult process. We’d recommend seeking advice from a tax expert before going down the partnership

Limited company incorporation

Many BTL investors have chosen to incorporate their property investment activities under the banner of a limited company. 

This has a range of benefits vs personal BTL ownership, but here’s the big two:

  • Limited companies can claim 100% mortgage interest tax relief and letting expenses – almost like Section 24 never happened.
  • Income is taxed at a flat 19% corporation tax rate, rather than the marginal 20%, 40% and 45% income tax rates – a major tax saving for investors.

Here’s the catch. If you want to transfer ownership of your existing portfolio into your limited company, there’s still capital gains tax and stamp duty to pay. 

However, depending on your circumstances, you might find the long-term benefits more than outweigh the short-term financial hit.

Get help with property investment tax

As you can see, there’s no one-size-fits-all for navigating the end of mortgage interest tax relief; but there are plenty of approaches for mitigating the financial impact.

Not sure which option is right for you? The tax experts at GNS Associates can help you identify the best tax-efficient solution for your particular property investment business. Get in touch with our team on 0208 090 2604 or info@gnsassociates.co.uk to find out more.

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