In July 2015, the then Chancellor, George Osborne, delivered his summer Budget announcing his intention to create a more level playing field between people who were buying to let and those buying.
He claimed that buy-to-let landlords have a huge advantage in the market because they can offset their mortgage interest payments against their income, which homebuyers can’t do. In order to address this perceived unfairness, Mr Osborne introduced Section 24 of the Finance (no. 2) Act 2015, to be phased in from April 2017.
Previously, landlords were taxed on any profits they received. This is the normal way for business to be taxed, but under the new system they will be taxed on their gross monthly income, before they make any mortgage interest payments, instead of on their profits.
How will it be implemented?
In order to prevent landlords from being impacted by the full effects of Section 24 all at once, the changes are being phased in in four stages between April of this year and 2021.
In the first phase, which is now in effect, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.
In the second phase, to come into effect from April 6th next year, the amount of tax relief can be claimed at the higher rates will drop to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.
The third phase will apply from April 6th 2019 and from then the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.
In the final phase, which will be in effect by April 2021, landlords will only be able to claim tax relief at the basic rate of 20%.
Who will be affected?
The government have claimed that the impact will be limited in terms of both the numbers of landlords affected and the scale of the effect on their finances, but in practice any landlord with a loan or mortgage interest on their property will be affected by these changes.
For some landlords the changes will not affect the financial viability of their portfolio, but for others the consequences could be serious, with some even paying more in tax than they make in net profit, which could lead to landlords being declared bankrupt.
Many will seek to offset the impact of Section 24 by increasing rents, but tenants can’t pay rent they can’t afford, which could lead to landlords selling their properties and leaving the sector.
This option may not be available, however, if the properties are in negative equity.
Landlords with negative equity who are concerned about the impact of Section 24 can contact Landlord Debt Advisory for an initial free consultation.