with Kristen Durose
Kristen Durose is the managing director of Red Star Wealth Management, a company of independent financial advisers based in Blackpool, Lancashire. You can see her company website here.
Buy-to-let tax changes under the guise of Section 24 or the Tenant Tax are making some forms of property investment much less profitable. Today Amy and Kristen look at what Section 24 is, when it is being introduced, and at what buy-to-let landlords need to know to survive it.
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Buy-To-Let Tax Changes
Amy: One of the biggest things that I'm sure our viewers are be hoping I'll ask you about is the buy-to-let tax changes. Everything is changing at the moment and it's confusing and complicated.
Kristen: Of course.
Amy: Could you simplify things for us?
Kristen: I'll try my best but to be clear, I am not an accountant. I can talk through some of the details but, on this subject, investors really need to be engaging with accountants.
Amy: Absolutely.
Kristen: So, if you are a property investor or landlord, and you haven't got one already, then getting an accountant is strongly advised.
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The Tenant Tax
Kristen: The changes to tax on buy to let that have come in have been, to an extent, controversial. And I know that there is a whole campaign dedicated to axing the tenant tax.
Amy: The tenant tax. So, not the landlord tax, but the tenant tax.
Kristen: Yes, people call Section 24 the tenant tax but this shouldn't be confused with the Daily Mirror story from last year regarding a different tenant tax. So, not that, but Section 24.
What Is Section 24?
Kristen: Section 24 means that landlords can now only claim basic rate tax relief on financing, which in most cases will mean a mortgage.
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Before the changes, if you were a higher rate taxpayer, you could claim higher rate tax relief on mortgage interest payments. That has changed so that now you can only claim basic rate relief.
So, if previously, you were only claiming basic rate relief before, nothing has changed for you. But for most property investors who are in the higher rate tax bracket, there is now, effectively, a 20% reduction on what they can claim.
Changes In How Profits Are Caluculated
Kristen: At the same time that Section 24 was introduced there was also a change in how profits from investing in property need to be calculated.
So, previously, you could automatically claim a percentage of wear and tear. Things like maintenance and decoration could be classed as an ongoing expense.
Now, these costs have to be properly documented, meaning you can only claim for the work you have had done. This makes things a little bit more complicated.
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The truth is that when you combine these factors together it's possibly not as efficient or profitable for people who own property, anymore.
Time Frames
Amy: Do you know what the time frames are and how this is being introduced? Is it gradual? Is it sledgehammer?
Kristen: It's not a sledgehammer. Section 24 is being phased in gradually.
So, currently, we have a situation where landlords can claim for 75% of their income from property or some of the interest they can claim for. 75% of that will be at the full rate and 25% will be at basic. But by 2021 you will only be able to claim the basic rates. So, in that regard, it's being phased in over a few years.
Putting It Together
Amy: Okay, Perfect. So, as you say, it's really important for property investors to speak with an accountant or financial advisor. And they need to act on the guidance they get because it's going to affect everybody differently.
Kristen: It is. And despite the campaign to get rid of it, I think this is going to be permanent. Property investment in the UK is a big earner for a lot of people and this is a way that the government can increase its revenue. It's coming in.
Amy: Easy pickings.
But, in our interviews with specialists, we're discovering that with every problem that arises there are always opportunities that come off the back of it. It's always about looking at the situation and working out exactly how you can work with it.