Section 24 Revisited - Mortgage Interest Changes

*Please note the information in this article may be out of date

You may remember a time in the not too distant past when a man with a red suitcase dropped a little bombshell on landlords. 8th July 2015 to be specific. This was the announcement date of restrictions on tax relief given to landlords with regards mortgage interest incurred on their rental properties.

Since then, not much else has happened. The odd general election here and there, something being discussed in Parliament beginning with B, two new prime ministers, and Gary Lineker presenting Match of the Day in his underpants after Leicester City won the Premier League.

However, the build up to the mortgage interest changes is over. The changes began to be phased in from April 2017 and in April 2020 they are going to be fully effective. Whether you were fully prepared for the changes, happily unaffected by them, or you’re just starting to notice an increase in your tax bill, it’s time to revisit the new rules and look at what can be done if you are not happy with your current position.

What Changed?

The effect of the change was to remove mortgage interest from being an allowable expense and replacing this with a basic rate deduction of 20%. This has been introduced in phases, by a percentage of the mortgage interest being subject to the old rules and percentage subject to the new rules. The percentages of the new rule introduction are as follows:

• 2017/18 – 25%
• 2018/19 – 50% (The year you are currently doing your tax return for)
• 2019/20 – 75%
• 2020/21 – 100%

Your position

By now, you should have an idea as to whether you are going to be affected by the mortgage interest changes, or not, from your tax returns. If your income remains well within the basic rate of tax, you may be unaffected by the changes and you can do nothing (apart from re-evaluating the situation if your income level changes).

If you are close to or have already exceeded the higher rate band of tax, and have a mortgaged rental property, then now is the time to re-evaluate, to see if there is anything you can do to minimise the impact of section 24 before it is introduced in full in April 2020.

What can I do?

First, if you are a new landlord, or are not sure of your position moving forward (maybe because of a change of income level or circumstances), it is strongly recommended that you work on some calculations to assess the impact. There has been no shortage of landlords who have stressed a lot over the impact of section 24, only to find that when they sit down, it’s not as bad as they thought! The opposite can also happen, a nasty surprise when the tax bill comes along. Ouch! Some form of projected calculation can at least make it the devil you know, and then you can look at appropriate strategies.

I Need A Strategy!

For the mitigation of Section 24, there are several strategies that can be looked at. In tax, there is rarely a one-size-fits-all solution to anything, and sometimes there are considerations that are not tax related, but here are few avenues to explore:

Limited Companies – A rental property owned within a limited company structure, still gets full tax relief for any interest on a mortgage taken out for purchasing the property. There are a lot of pros and cons of a company, so it is a decision that shouldn’t be taken lightly. If you already have a rental portfolio, it is worth looking at whether the property meets the case law definition of a business, and therefore whether it could receive relief for both capital gains tax and stamp duty land tax through the Ramsey Case ruling.

Moving income to a spouse – If one spouse earns more than the other, there may be an opportunity to minimise the impact of the mortgage changes, by rearranging the property ownership so that the lower earning spouse takes more of the property income. There are specific rules about how you can redistribute property income between spouses, which dictate that the profits are taxed 50:50 unless a declaration is made through HMRC Form 17, so as to be taxed on the actual ownership split. Stamp Duty Land tax can be an issue when making any transfers of ownership.

Limited Liability Partnerships – An LLP can be an alternative to provide a bit more flexibility as to how profits are split. While an LLP is seen as somewhere in between a company and an individual, unfortunately, the income is still subject to income tax rules rather than corporation tax rules. There is an option to introduce a company as partner in a partnership. However, this is unlikely to be the answer to section 24 as there is very specific anti avoidance legislation that prevents using the company in a mixed partnership for tax avoidance.

Investing in different types of property – Not all property income is subject to Section 24. Commercial property, furnished holiday lets and certain types of property businesses that amount to trading income rather than property income, are not subject to the same Section 24 restrictions as normal residential property lets. This should be considered when planning future investments.

Increase your pension contributions – If you make contributions to your personal pension, this increases the point at which you start paying higher rate tax. This is subject to an annual allowance and lifetime allowances, but within prescribed limits, this is effective at keeping your income within the basic rate band and it therefore not being subject to the mortgage interest changes.

Keep an eye on the higher rate band – We have a budget date announced for March 11th, 2020. An important part to keep your eye on is what the higher rate threshold is for each tax year. At the moment, it is £50,000. If this was to be extended further, it would naturally affect the position with regards your exposure to the mortgage rules, and so this would also be time to re-do some calculations before proceeding.

Sell some properties and pay down your mortgage – If you’re violently shaking your head at the moment, this probably isn’t for you. However, for some people, perhaps if there are some non-tax reasons for doing so, reducing the size of their property portfolio is the best option. The additional proceeds can be used to pay down the mortgages. While this can actually make the tax slightly higher because there is more income, this profit is “real” extra profit (rather than the artificial extra profit that can be realised from the Section 24 mortgage interest changes) and therefore you are still in a better net position.

Conclusion

There are three top tips for helping you deal with the ever-increasing impacts of section 24:

• Stay aware of what your position is going to be at the end of the tax year, so there are no nasty surprises with tax bills. Completing your tax return early will help!
• Keep up to date with the latest changes in tax rules that could affect your position (like the higher rate band being changed in the future).
• Don’t be afraid to plan ahead and change your plans if needs be. Plans made back in 2015 when the rules were first introduced, may not take in to account the latest changes, and it is therefore worthwhile looking at your position periodically.

Specialist property tax advisors, such as Rita4Rent, will be able to help with all three.