Section 24 and the upcoming restriction of mortgage interest and finance costs, has been a massive bombshell to many landlords. It affects those who personally own residential BTL property. As a very brief recap, from 6 April 2017 a 4 year equal phase in commences, and by 2020, mortgage interest and finance costs will no longer form part of your rental profit, giving an inflated and somewhat artificially higher profit. This new profit figure is then taxed, with HMRC then commonly allowing you to deduct an amount equating to your mortgage interest and finance costs, multiplied by 20%. We use the word commonly, as strictly, the reducer is 20% of the lowest of:
- Finance costs and mortgage interest not deducted from your income
- Your rental profits less any losses brought forward
- Your total income (less savings/dividend income) which exceeds the personal allowance
A lot more landlords are affected than we are led to believe. As well as higher rate and additional rate taxpayers being affected, there are also those who will move into a different tax banding, meaning that a landlord who was previously a basic rate taxpayer could find themselves in a higher bracket. Then there are other factors, such as the new inflated profit meaning some landlords will face either full or partial loss of child benefit, child tax credits, as well as potentially seeing their student loan deductions affected.
There have been many strategies landlords have explored in mitigating the changes, such as exploring different property types, selling poor performing property, Form 17, additional gift aid/AVC pension contributions, and simply increasing rent.
One very popular idea has been setting up a limited company to hold BTL property. RITA4Rent have produced an infographic to explore this option, looking at the various considerations. A limited company can work very well for a lot of landlords, but for others, less so. It is a very important decision, and here at RITA, we always stress that any decision should form part of your long term overall strategy, as opposed to being a rushed decision to simply attempt to save tax. There are a lot of considerations, and with no one size fits all solution, care must be taken to take the right approach for your own individual circumstances.