Explaining the changes to Section 24, how it works and answering whether you can avoid it completely...
If you’re a landlord, Section 24 are words you will know all too well.
Recent changes to Section 24 see landlords paying more money in tax, which minimises their profits and makes residential rental properties a less attractive business venture.
Watching the amount of tax you’re paying increase, whilst your profits decrease, leads you to question whether or not you can avoid the ‘Section 24 tax’ completely…
A good question – one which we’re going to answer for you!
Not only will we answer this important question, but we will also talk you through the basics of Section 24, how it works and what the changes mean for landlords…
To help answer a specific question, use this menu as a guide to find you your answer:
- What is Section 24?
- How does Section 24 work?
- How do you get around Section 24?
- Can I avoid the Section 24 tax completely?
Want to escape Section 24?
Section 24 is an amendment in the UK tax law, which applies to income on residential rental properties. The change means the amount of income tax relief received by landlords for residential property finance will be restricted.
As of now, landlords can only claim a tax credit of 20%, based on their loan and mortgage interests. It has also resulted in some landlords being pushed into a higher tax bracket, meaning they are paying more tax, reducing their profits.
Why was it introduced?
The Section 24 tax was introduced, alongside other measures, to try to slow the growth of the private rental sector. At the time of announcement, there were fears of a property ‘bubble’ developing – a concern as bubbles inevitably ‘burst’ causing damage to the wider economy.
The idea of introducing the Section 24 tax is it makes it harder for landlords to profit on buy to let properties and so will remove some landlords from the sector, helping to slow the market down.
Section 24 also makes the ‘flipping’ of houses less profitable, meaning there are less doing it, resulting in more properties on the market, making it easier for first time buyers to get their foot on the property ladder.
What costs can no longer be claimed under Section 24?
Since the introduction of Section 24, there are now costs which can no longer be claimed by landlords, which are:
- Mortgage interest
- Mortgage arrangement fees
- Penalties associated with settling a mortgage early
- Interest payable on loans taken out to renovate or refurbish a property
Section 24 means that landlords will have to pay income tax on all earnings from their property, and they can only claim back up to 20% tax relief on this.
We know this may sound slightly confusing, so looking at this example may be able to explain things a little better:
- In this example, let’s imagine your rental income is £15,000 and your mortgage interest will be £5,000
- You will have to pay tax on the full rental income
- For the basic rate taxpayers, at 20%, the tax will be £3,000 and for the higher rate taxpayers, at 40%, the tax will be £6,000
- You can then claim back 20% of your mortgage interest payments, which is £1,000 (as £1,000 is 20% of £5,000)
- This claim back therefore means overall basic rate taxpayers will pay £2,000 in tax and higher rate taxpayers will pay £5,000 in tax
As you can see, those who are on a higher rate of tax are more effected by Section 24. This will try to discourage possible landlords from joining the private rental sector.
Fed up of paying lots of Section 24 tax and don't know what to do?
What does Section 24 tax mean for landlords?
Depending on the tax band you fall into, Section 24 will have a differing effect. Those landlords who have larger property portfolios, who pay a higher rate of tax, will be the most affected.
Once again, we know this sounds a little confusing. To help you understand, we’ll use the above example to explain…
Before Section 24, basic rate taxpayers still paid £2,000 in tax whereas higher rate taxpayers paid £4,000. This shows an increase in the tax paid of £1,000. Those with larger portfolios will have a larger rental income, so the effect of Section 24 is much bigger.
If you are a landlord, whether you have one property or a big portfolio, annoyingly you will affected by Section 24. But are there ways to help you get around Section 24 and minimise its effects?
Yes! And we have them listed here for you:
- Re-mortage - This allows the landlord to capitalise on lower interest rates and may help you find a more competitive loan
- Reduce your portfolio - It may help to get rid of some of the worst performing properties, meaning you will reduce the amount you’re taxed on = less tax to pay
- Increase the rent - This would probably not be the first-choice option, as it may lose you your tenants, but it is a solution to help gain back some of the profits you lost to tax. *TIP- If you are to increase the rent, make sure you don’t fall into a higher tax band, as this will only increase the tax burden*
- Become a limited company - Limited companies are exempt from the Section 24 tax and so moving your portfolio into a limited company can help you beat the system. BUT you need to keep in mind that in transferring your portfolio, you will likely be hit with stamp duty tax and capital gains tax, alongside ‘remortgage fees’ and early repayment penalties from lenders, so this may be quite a costly option
- Move to commercial properties - Section 24 tax only applies to residential properties and so by switching to a commercial property portfolio, you’re able to ‘get around’ the rules
- Reduce costs elsewhere - Having a look at where you’re spending a lot of money on the property will help you to see where you can cut back on spending. For example, if you hire a management company to manage your properties, you could start to manage your portfolio yourself
- Transfer to a lower-income partner - If you can transfer ownership of your portfolio to a partner who is on a lower income, or they pay the basic rate of tax (or even better no tax at all), this can help to reduce the amount of tax to be paid on rental income
- Sell your portfolio - Selling your portfolio may be a last resort but will help you to fully avoid the Section 24 tax altogether, as you won’t be a landlord anymore. However, selling a property is never cheap… unless you stay tuned for our next section – we’ll help you find a way to sell your properties with NO cost to you…
Decided you want to sell your portfolio?
In short, yes you can avoid the Section 24 tax completely, but it may come at a big cost to you. As we said earlier, you can become a limited company, moving your portfolio under it, to make yourself exempt from Section 24 but you will be hit by stamp duty tax and capital gains tax, alongside other fees, making it a costly option.
Another way to completely avoid the Section 24 tax is by selling your property portfolio, a method which can have little to NO cost, depending on how you choose to sell…
You can also sell your property with tenants 'in situ' - something that may make your property appeal to other current landlords, or ‘soon to be’ landlords!
To help you decide the best method for you to sell to avoid the Section 24 tax and as many other costs as possible, let’s look at the options when it comes to selling:
Estate Agent - Probably the first option which comes to mind when you think of selling a property (or five) to help avoid the Section 24 tax is through an estate agent on the open market. This route will involve an estate agent viewing and valuing your property, listing it on the open market and different property portals, and waiting for interested parties to come forward to arrange viewings and (hopefully) make offers.
Offers placed have no guarantee of being at the asking price of the house and are likely to be subject to survey, meaning a buyer may choose to reduce their offer, or even withdraw their offer completely, after a survey has taken place, leaving you stuck with the Section 24 tax for longer.
It’s also a costly option, leaving you with lots of fees to pay (we’re thinking legal fees, estate agent fees, survey fees and more). Also, if you’re trying to sell the property with sitting tenants, it may be difficult to arrange viewings around them or the tenants may be rude to viewers, putting off any potential buyers, making selling through the open market a more difficult and less desirable option.
If you’re a landlord with a big property portfolio, selling on the open market to avoid the Section 24 tax may also be difficult, as you will have fees to pay on every property sold and you will be expected to keep on top of arranging property viewings, which is increasingly difficult with the more properties you own.
Selling through an estate agent is also a slow option, with the average time taken for completion 18 weeks (The Advisory), meaning you will have to pay the Section 24 tax for a longer time, costing you more money.
Part Exchange - A part exchange scheme is where you trade the value of your current house against a new build property, with your property acting as a ‘part payment’ for the new build. If you’re after a quick house sale, a part exchange scheme could be a good option, as it means a guaranteed sale of your property and no chain.
However, if you’re selling properties to avoid the Section 24 tax, then a part exchange will not be a helpful selling method for you, as you’re gaining a new property as a ‘replacement’ for the one you were trying to ‘cut ties’ with.
If you want to find out more about Part Exchange, then read this.
Want to sell without paying any fees?
Auction - Another option you have to sell your properties to avoid Section 24 tax is through an auction. At auction you get serious buyers, who will exchange contracts as soon as a hammer comes down and will complete in 20 to 28 days, helping you to sell your properties quickly, avoiding further tax costs.
However, even at auction, buyers can and do pull out of sales, meaning they forfeit their deposit. Also, at auction, you will have to have several open days to allow potential buyers the opportunity to properly look at the property. This may not be the best option if you’re selling tenanted properties, with tenants adding an extra difficulty to arranging viewings.
Also, at auction, you have to cover your own legal fees and you have to pay a commission of the sold price to the auctioneer and pay for advertising and marketing costs, as well as room hire, making it a costly option, especially if you have a large portfolio.
The price your house sells at, at auction, can also be significantly below the ‘market price’. The buying of your property will also be subject to a survey, so there are no guarantees the sale will go through.
The sale can also take between 6-10 weeks to complete, meaning you will be stuck paying the Section 24 tax for even longer…
If you're wanting to know more about selling a house at auction, then click here.
Cash House Buying Company - Selling to a cash house buying company, also known as a ‘quick house sale company’, may be another road for you to go down when trying to sell to avoid the Section 24 tax.
Quick house sale companies will give you a cash offer for your property, which is a guaranteed price and therefore means you have a guaranteed buyer. Your legal fees will be covered by the company and you don’t have to pay any commissions or fees – essentially you can sell your portfolio for free!
As the name suggests, quick house sale companies specialise in buying your properties FAST, helping you escape the Section 24 tax ASAP! Some quick house sale companies can have the property sold and cash in your bank in as little as 7 days.
Unlike on the open market and at auction, selling to a cash house buying company only involves one quick house viewing, to help ensure that the valuation and offer for your property is as accurate as possible, making it easier to arrange if you have tenants in situ.
The offer you will get is generally slightly below the market value of the property, but it’s a quick cash sale, making it quicker and easier to sell a big portfolio.
If this option sounds like something you might need, to help you get away from the Section 24 tax, then you’ll be wondering where to find a quick house sale company…
*HINT - you're looking right at one*
Here at The Property Buying Company, we’re a cash buyer of houses, buying any property in any condition, in as little as 7 days, all whilst covering your legal fees!
Our offer isn’t subject to a survey and we only require one quick viewing to make sure our offer is accurate, which we can arrange for a date and time to suit you and any tenants.
Our offer may be slightly below market value, but our average completion time is 2-3 weeks, meaning you can quickly sell your property and escape the Section 24 tax!
We have over 50 years’ combined experience in the industry and countless good reviews on trust pilot (feel free to check them out), which we believe shows we’re a quick house sale company you can trust.
To get you on your way to selling your portfolio and avoiding the Section 24 tax, all you need to do is give us a call or fill in our online form to receive a no-obligation cash offer – it’s worth a try!
Ready to escape Section 24 and sell your portfolio fast?