What Is The Tenant Tax And Is It Going to Cost Me?
Also known as Section 24, this tax is coming as a nasty surprise to most landlords, even though it has already begun to be phased in. Stats show that 28% of landlords will actually be left having to subsidise their properties in 2020 as a result of this new tax. We spoke to Steven, a landlord in the North East of England who is going to be forced to pay £2,000 more in tax next year.
How do the Section 24 tax changes affect your rental profits?
‘What’s unbelievable to me is that I’m just finding this out now. This tax is going to put a huge dent in my profits and it seems to have just got in under the radar. No one is talking about it!’ When asked what he plans to do, Steven sounded frustrated, ‘Raising rents feels like the only thing that makes sense. I don’t want to do that to my tenants but what choice do I have? I won’t be making any more profit, this is just so I don’t lose money.’ Landlords can find out exactly how much they will stand to lose by using this free online Tenant Tax Calculator.
Steven is not alone. When asked the same question, 44% of landlords confessed that they would be hiking up their rents to close the gap. Although a quick fix, putting rents up has its drawbacks. Only around half of all landlords will be affected by the tax – those with mortgages. If these landlords then raise rents, they risk becoming uncompetitive and less visible on sites like Rightmove and Zoopla. Considering that 92% of people now look for properties online, this seems like a bad idea and one that will hurt their business in the long run.
Others will try to get around Section 24 by incorporating and becoming limited companies. A good idea in theory but this route isn’t practical for most as 19% corporation tax will apply, as will capital gains tax or stamp duty and the increased administrative burden of operating a company.
A final disturbing statistic: one third of surveyed landlords admitted that, where the Tenant Tax was concerned, they had their heads firmly in the sand. The most important thing to realise is Section 24 is not a possibility – it’s a certainty. No one can change that, but what anyone affected can do is make sure they are prepared by cutting down on unnecessary outgoings like voids and letting costs.