Tax changes mean more pain for tenants and landlords soon!


If you’re a new landlord, or you’ve not been following the news recently then you may not have realised that a little thing called Clause 24 (now Section 24 of the Finance Act 2015), is about to punch you in the wallet – whether you’re a landlord or a tenant. Whilst it might not seem like tenants and landlords are always on the same side, trust me when I say that on this one, we are all in it together!

So what is Clause 24?

In short, up until 2017, landlords can offset the interest on their mortgage against their tax bill. This is known as Mortgage Interest Tax Relief, and it exists because for most landlords, having a mortgage is a necessary cost of doing business. That allowance is being phased out over the next few years, in a move that the government have claimed will strike only the wealthiest of landlords. In reality, it will strike the least wealthy landlords, leaving the largest landlords totally untouched, and costs will inevitably be pushed onto tenants, meaning higher rents. To see why, I’ve created a table below that will show how these changed will affect “Sarah”.

Sarah is a (fictional) professional woman who owns one rental property. She is just inside the higher-rate taxpayer bracket, and pays £450 per month in interest on her mortgage. After some allowable expenses, she makes a taxable profit of £300 per month from the rent today. But over the next few years, she will pay an increasing amount of tax on income she doesn’t make because it goes straight to the mortgage company. By 2020, she will be paying tax on £750 per month of income, even though she only walks away with £300 per month. Bonkers. This means that her modest profit of £180 per month after tax today, will be cut in half by 2020. Remember, that money has to include an element of savings to cover any repairs that may be needed on the property – leaving Sarah dangerously close to the wire financially.

As now

Transitional rules

New rules

2016/17

2017/18

2018/19

2019/20

2020/21

Rental income

£800

£800

£800

£800

£800

Mortgage interest

£450

£450

£450

£450

£450

Allowable Expenses

£50

£50

£50

£50

£50

Profit before tax

£300

£300

£300

£300

£300

% Interest relief

100%

75%

50%

25%

0%

Interest now taxable

£0

£112.50

£225

£337.50

£450

Taxable profit

£300

£412.50

£525

£637.50

£750

Tax chargeable

£120

£164.80

£210

£254.80

£300

Less 20% tax credit

£0

-£23

-£45

-£68

-£90

Tax due

£120

£141.80

£165

£186.80

£210

Net profit after tax

£180

£158.20

£135

£113.20

£90

So Sarah has two options – sell the property (which may also incur taxes, but that’s a whole other blog), or raise rents, in which case the tenant is going to be the ultimate victim of this tax hike.

“The most wealthy landlords” – you know, the ones supposedly targeted by this? They are actually the larger corporate organisations that may own thousands of properties – and they are exempt from the legislation. Yup, it’s the individual landlords  (and their tenants) who will get the entire impact of this.

Since the Department for Communities and Local Government’s Private Landlords Survey 2010 (which is the latest available) states that 81% of landlord’s own just one rental property, we can say that this issue will directly affect about 1.7 million properties. Since the average rental property has 2.3 tenants, which makes 4.6million tenants at risk of rent increases!

So what can you do about this?

First thing is first: Write to your MP outlining your concerns - writetothem.com

Secondly: Consider supporting the legal challenge here.

Thirdly: Plan ahead. Everybody is different, so you can get a good guide to the impact this may have for your personal circumstances by using the calculator here.

Finally: seek advice from the professionals. I can’t get into every possible angle here – there are simply too many. But if you do have concerns then find a reputable property expert and ask them to make suggestions about the way forward. An accountant might also be able to help by identifying better ways to manage your affairs. Myself, Matt and Jasmine are campaigning hard to get this discriminatory and unfair legislation scrapped – but we need your help.

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