What is Section 24 mortgage interest relief cap?
Are you tired of HMRC taking all of your hard-earned property profits?
What is the UK Section 24 tax loophole?
How does S24 increase tax for landlords?
See how much tax you will pay if you purchase a buy to let property in your own name or in a limited company using our free online rental income tax calculator.
You may be interested in our main article, “Buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.
In all its wisdom, HMRC will say that the mortgage interest you pay on your property portfolio will be treated as zero cost. Therefore, the higher your property portfolio is, the more significant the income you will be deemed to have received.
Pre-2017/18, property investors could offset 100% of the mortgage costs against their property income. From 2017/18, the amount of mortgage interest allowed to be offset against property income will be reduced to 75%. There will be a further reduction of 25% each year until 2020/21 when no allowance will be made to offset mortgage interest against property income to calculate the tax due.
We believe this tax deduction should be allowed despite what HMRC says; how about you?
In place of mortgage interest being a tax-deductible cost, it will be a 20% tax reducer. This tax reducer is calculated as 20% of the lesser of
– Mortgage interest costs
– Property profit (clearly excluding mortgage interest as a cost)
– Taxable income as a whole
The tax reducer will start at 25% for the tax year 2017/18. This will increase by 25% until 2020/21, when the 20% tax reducer will be set at 100% of the above values.
As you can see, HMRC is replacing the mortgage interest cost allowance with the mortgage tax reducer. Be sure to work with us to find the right Section 24 of the Finance Act tax loophole that works for you.
The S24 changes mean that the amount of income tax that landlords pay on their residential property investments will significantly increase. The impact of Section 24 is crushing for many accidental landlords that will be forced to sell and pay Capital Gains Tax (CGT) to HMRC.
Section 24 example
John is an employee earning £50,000 and had the following income/costs for property in 2016/17
– £50,000 rental income
– (£20,000) mortgage interest cost
– £30,000 property profit
– £12,000 buy to let tax liability (as a higher rate taxpayer paying 40% tax = £30,000 x 40%)
In 2017/18 the situation will be:
– £50,000 rental income
– (£15,000) mortgage interest cost (reduced from £20,000)
– £35,000 profit
– £14,000 buy to let tax liability (as a higher rate taxpayer paying 40% tax = £35,000 x 40%)
The £14,000 is reduced by the tax reducer as follows:
25% of the 20% tax reducer rate is 5%. The 5% tax reducer rate is the lower of
– £35,000 property profit
– £15,000 mortgage interest
– £85,000 taxable income
Therefore, John receives a tax reducer of £750 (£15,000 X 5%). The tax liability is then:
– £14,000 tax calculated as above less
– £750 tax reducer
– £13,250 tax to pay
As we can see, John paid £1,250 more tax in 17/18 than he did the prior year on exactly the same amount of real profit.
Is there a tax loophole?
Basic rate become high rate taxpayers
The basic rate may become higher rate for taxpayers. This is because the mortgage interest cost is moved out of the property profits. This means that taxpayers will show a greater paper profit than realised. This is all because of the new tax rules for mortgage interest.
Joan owns a property portfolio and has other income amounting to £15,000 that takes up her tax-free personal allowance.
– £70,000 rental income from her buy-to-let properties
– £15,000 property costs
– £25,000 mortgage interest costs
– £30,000 profit
– £6,000 tax
– 20% tax on the property profits made (£6,000 income tax divided by £30,000 property profits)
Someone who earns £30,000 is a basic rate taxpayer, even when the personal allowance is taken up by other taxable income. This is certainly the case before the impact of the S24 mortgage interest relief restriction. However, now that S24 is fully enforced, Joan’s self-assessment tax return will look like this
– £70,000 rental income from her buy-to-let properties
– £15,000 property costs
– £55,000 profit
– £15,000 income tax (£35,000 X 20% basic rate tax band + £20,000 X 40% high rate tax band)
– (£5,000) less mortgage interest tax credit £25,000 X 20%
– £10,000 net income tax liability
– 33.3% income tax of the property profits made (£10,000 income tax dividend by £30,000 real property profits)
Part of the income tax calculator is at the basic rate tax band, and an element is at the high rate tax band. Many UK landlords that buy properties as an investment will pay more income tax than ever before.
We can help you find the most suitable tax loophole that meets your needs.
S24 mortgage interest relief cap solution – Use a Deed of trust
Tax loophole 1:
You could transfer property income If you have a spouse that is a lower tax earner. If they remain a basic rate taxpayer once the beneficiary of the properties is transferred, then Section 24 may be mitigated. You will need to book some time with us to discuss this.
A deed of trust will be required to show that the beneficiary interest has been transferred. If you currently own the property, then you will also need to complete a form 17 to tell HMRC that the beneficiary entitlement is no longer 50/50.
You must be mindful that you must speak with your mortgage lenders. Please see their terms and conditions to see if you can transfer the beneficiary of the property. If they require the second person to be added to the mortgage, then there could well be an SDLT implication, as there will be a land transaction based on their share of the mortgage. There is now a double effect with the 3% SDLT surcharge and the SDLT standard rates.
S24 mortgage interest relief cap solution – incorporation of your property portfolio into a limited company
Tax loophole 3:
We have written a separate article on how to incorporate your property business into a limited company. The laws relating to the Ramsey 2013 case at the Upper Tax Tribunal are as follows:
– 162 of the TCGA 1992 (for the CGT incorporation relief)
– 15 land and buildings FA 2003 (for the SDLT relief)
The process to move the properties into a simple/ordinary partnership. This is not to be confused with a Limited Partnership or a Limited Liability Partnership. After three years of operating as a partnership, you could incorporate it into a company tax structure.
Please note that the stamp duty charge is voided (i.e. never payable) by you following the below process; however, the CGT is simply deferred under S162 incorporation relief.