This tax is nothing new though. It was introduced in April 2017, but many landlords still know very little about it. Currently, they can offset mortgage interest against their income from rentals before calculating their profits and taxes. However, the latest change to the legislation means that by 2021 landlords with mortgages will not be able to claim mortgage interest as tax deductible. Rental profits will now be taxed with a maximum deduction of 20%.
Those landlords who own their property outright will not be affected by the changes.
Will The Change Affect Me?
You will be affected by the Section 24 changes if you have any kind of loan or mortgage interest on your BTL property that is a considerable proportion of your costs. You will now have to pay tax on these costs, as well as any profits you make. You should not assume that this change won’t affect you. Instead, carry out a thorough assessment of your finances, or talk to a tax specialist, such as those at MCC Accountants.
How Can I Minimise The Effects Of The Change?
The effects of the ‘Tenant Tax’ are expected to be significant. On average, it is thought that landlords will have to pay an extra £2000 in tax once the change has been fully implemented.
You should be wary of raising rents to compensate for the tax increase, though 44% of respondents in a recent survey by online letting agency Upad stated that they would be doing so. There is potential for this activity to harm your rental yields. Instead, you should consider setting up a company to purchase BTL properties, or transferring properties you own as an individual into a limited company.. It may be necessary to sell some lower yielding properties and reduce mortgage payments. Alternatively, if your partner is in a lower tax bracket, transferring the properties into their name may be an idea, though this may have repercussions on inheritance and capital gains tax.
Mortgage arrangement and broker fees will also no longer be tax deductible under the new legislation. Before 2016, if a property was rented out in a furnished state, HMRC allowed landlords to offset 10% against their income every year. This could be done whether furniture was replaced or not. Now, however, this can only be done if furniture is actually replaced on a like-for-like basis. You should therefore be cautious of replacing furniture unless it is absolutely necessary.
How Mistoria Can Help
If you are interested in renting out student houses, Manchester based Mistoria Estate Agents are here to help. Our property professionals are on hand to assist with any query you may have, including the complex legislation, such as the Tenant Tax, which surrounds properties of this kind. Give us a call for more information.