Due to a change made in the Summer Budget of 2015, it is thought that 1 in 5 landlords will be affected by Section 24, which relates to relief for finance costs regarding residential property businesses. The Clause, which has been in effect since 6th April 2017, set out changes in legislation regarding the way in which landlords of residential properties can claim relief for finance costs.
Who will be affected?
Section 24 does not affect everyone, but will affect individuals who own rental properties in their own names. UK and non-UK resident companies that own buy-to-let properties, cash investors and landlords of Furnished Holiday Lettings will remain unaffected.
The measure essentially prevents buy-to-let costs from being a claimable business expense. While this largely will affect mortgage payments, it will also have an impact upon loans, overdrafts, alternative finance returns, fees and any other incidental costs for getting or repaying mortgages and loans, as well as discounts, premiums and disguised interest.
The restrictions apply to what the legislation refers to as a “dwelling-related loan”, whereby “dwelling-house” applies to a residential property and can include the attached land and/or gardens. Commercial lettings, however, have been specifically excluded from this definition. In the legislation, if the business receives rental income from a dwelling-house and the loan is used to cover that part of the business, the restrictions will apply to that amount of money borrowed for property business purposes.
What will happen as a result of these changes?
There currently is no available relief for capital repayments of a mortgage or loan, and landlords are no longer able to deduct financial costs from property income to arrive at property profits. Instead, they will receive a basic rate reduction from their income tax liability for the finance costs, which will be monitored through information gathered from their tax return.
From an administration perspective, the changes will affect individuals, as well as partners in partnerships, who receive an income from residential property that acquires finance costs. Despite these changes, it is thought that the administrative burden on the individual will be minor and most people affected will still only need to complete one box for finance costs when filling out the self-assessment return. The new tax calculation will be automatic for those filing their returns online, while a tax calculator will be available to those filing paper returns. For individuals with rental income from residential and commercial properties, there will be an additional administrative burden, as an additional box will need to be completed.
How will this affect landlords financially?
Co-claimants Steve Bolton and Chris Cooper, who represented the Axe the Tenant Tax Group in court, argued that these new rules would mean that a majority of landlords with mortgages would be forced to pay tax on their turnover as opposed to profit, which could leave many individuals with a rental loss and a shortfall of cash. Despite these fears that the changes that have arisen as a result of Section 24 are unfair, it has been predicted that the measure will not have a negative impact upon family formation or stability.