It’s finally arrived; Section 24 became effective from the 6th of April 2017 and starts the 4 year phased process of reducing mortgage interest relief to the basic rate of tax.
We’ve produced a brand new Section 24 guide, which will help you get your head around the changes, how they might affect you and steps you can take to minimize its effects on your buy-to-let investment. We’ve spoken to key industry figures including our own CEO James Davis, Tom Entwistle of LandlordZONE, Vanessa Warwick of Property Tribes, Raj Jiwani of Charterhouse and Martina Lees, Sunday Times journalist and author of ‘the accidental landlord’. You can download the guide here.
Despite campaigning by Steve Bolton and Chris Cooper in the so-called ‘Axe the Tenant Tax Campaign’, the Government has stuck by their decision to tax landlords on their costs as well as their profits. Rather than sink into a pit of despair, be proactive and start taking action now, if you haven’t already, with the following advice.
What can I do to minimize the effects of Section 24?
Speak to a tax or finance advisor
You need to assess your finances now, to see if it’s still viable for you to let a property. Many landlords have claimed that they will start making losses on their buy-to-let investments; don’t be caught out having to make a quick sale because you weren’t fully aware of the impact on your profits. Tax or finance specialist can help you to work out how much extra tax you’ll be paying over the next 4 years, how your profits will be affected, where you can cut costs and if there are any measures you can take to minimize your tax bill.
Set up a company
Many landlords have already taken this approach to reduce their tax bill. If you have a mid sized to large portfolio then it could be a good move to set up a company and therefore pay 20% corporation tax. Be aware that you may need to pay capital gains tax or stamp duty as in effect; your new company will be ‘buying’ your property from you.
Transfer ownership to a partner
If your spouse or partner is in a lower tax threshold, you may be able to transfer ownership of some of your properties to reduce the amount of tax you pay altogether. Married couples who jointly own rental property need to obtain a Form 17 from HMRC to “declare their beneficial interest in the joint property income” if they want to avoid automatically being taxed on a 50:50 split. However, be prepared, as changing the split could have implications on other taxes, such as capital gains tax and inheritance tax, so you should take advice beforehand.
Increase the rent
Some experts are warning that rents will have to rise this year. Many landlords have agreed, with our own research showing that 43% are planning to do so. It’s important to remember that you may not be able to increase rents, as the lettings market is still governed by supply and demand- if a tenants can’t pay more, you won’t be able to charge more. 41% of our surveyed landlords didn’t think the market could sustain rent increases. Rents increases are also likely to be deeply unpopular with tenants, especially long term ones, so you should think about adding some cost-effective, tax deductible improvements to your properties that justify asking for an increase. For example, you could provide Wi-Fi, upgrade the appliances or give the kitchen or bathroom a makeover. It could even be as simple as replacing an old carpet or offering your tenants a free spring clean – simple touches like these should help soften the blow.
Consider holiday lets
Another option could be to switch to fully furnished holiday lettings, as these are exempt from the tax changes so you can still claim full mortgage interest tax relief. In order for your property to qualify as a holiday let, it must be available to let for at least 210 days a year and it must be actually let for at least 105. However, this only makes sense in areas where there is high demand for short-term or holiday accommodation. Make sure that you check with your local authority to see if any special rules apply to holiday lets in your area as you might need planning permission.
Cut costs elsewhere
Look at your biggest expenses and decide what you can cut. After loans and finance costs associated with your buy-to-let, your biggest expense is likely to be agency and advertising fees. If you’ve always wondered what you’re actually paying your agent to do for that extortionate percentage fee and tenant find fees, consider self managing to save yourself £1000’s in costs and give a boost to your profits.
It’s drastic, but if the sums just don’t add up anymore then you may be forced to sell- don’t wait till it’s too late and end up having to take a low offer though. Also make sure you’ve adhered to all legislation related to serving a Section 21 notice on your existing tenants, or you could find yourself in a lengthy legal battle waiting to get them out before you can sell on.
Consider buying in more lucrative areas
If you do need to sell up, consider reinvesting in more lucrative areas up North, such as Manchester or Leeds, which offer lower initial investment costs and an increased rental yield.
If you’re considering self-managing, Upad offers fixed up front fees for advertising on the largest lettings portals such as Rightmove and Zoopla. Upad also offer competitive prices on paperwork and legal requirements, such as EPC’s and gas safety checks. We give you all the tools you need to self-manage and save yourself £1000’s.