Section 24: Everything You Need to Know
Ever wondered what the Section 24 law means for Property investors? Well, in today’s episode of The Progressive Property Podcast there’s no need to wonder as your host, Kevin McDonnell tells us everything you need to know about the 4-stage law affecting Property investor's mortgages. Discover the pros, cons, costs, and how you can save money by moving your properties over to a Limited company rather than keeping them in your personal name. Tune in today to save money and keep up to date with the property law affecting your investment portfolio.
KEY TAKEAWAYS.
Section 24 law, means that you are no longer able to claim mortgage interest or any other type of property finance as a tax-deductible expense in your property business if you own properties in your personal name. Instead, rental profit will be taxed with the maximum deductions for finance cost of 20% of the basic tax rate, phased in between 2017-2021. There are the 4 phases of the section 24 law. Stage 1 was from the 6th April 2017 tax year, where the higher rate tax relief can still be claimed on the first 75% of your mortgage interest cost. The remaining 25% will have a basic rate of tax relief applied. Stage 2 phased in from 6th April 2018 and that amount of tax relief can be claimed and the amount of tax relief you can claim at the higher rate will drop to 50% of your mortgage interest cost, the remaining will be taxed at the basic rate. Stage 3, higher rate tax relief for this financial year can only be applied to 25 % of your mortgage interest cost. Stage 4-April 2021 means you will only be able to claim tax relief at the basic level of 20%. For those who do own property in their own name, it poses a potentially big problem. It is important to remember that each person will face different issues depending on their own personal situation. This can vary between the location of the properties, how many properties you own and the mortgages you hold on each property. It may be valuable, to transfer the properties that are owned in your personal name over to a limited company. Currently, section 24 does not affect properties under Limited companies. If you have a small mortgage with a good profit, you might not want to do anything. However if you have properties in your name, and mortgages on them there is a chance you may see a big rise in your tax bill. It is advisable to seek professional advice from a property tax specialist. Your accountant/property tax specialist will be able to tell you how much higher your bill will be, and if there are ways to minimize it. Consider your medium to long term plans. If you are looking to sell within the next few years, it may not be advisable to transfer properties into a limited company. If you plan to pay down the mortgage soon, it may be advisable to keep them in your name. Section 24 does not affect those with no mortgages, it only affects the mortgage interest. If you plan to refinance and take out more finance on your properties then maybe you should look at moving the properties into a limited company so that you get a more beneficial tax advantage. If you decide it is the right decision to transfer your properties over to a limited company, there are certain steps you need to take.1) Have a limited company. You may already have one or you may need to make one. An important thing to note is that to be able to hold properties in a limited company, the properties must be owned by more than 1 person.
2) Note the pros and cons in terms of costs. If you move your properties into a limited company, this enables you to defer your capital gains tax under incorporation relief. However, if you were to sell the properties eventually, you will have to pay capital gains.
3)You need to think about the type of mortgage you have. You may need to redeem your mortgages, however, some companies that lend personally, do not lend to limited companies. Mortgages for limited companies also tend to be higher. There may also be penalties for those on fixed-rate mortgages.
4) Consider future possibilities. Perhaps the government will decide to reverse their decision to introduce section 24. Will the cost of transferring to a limited company such as mortgage costs and legal costs. Could you pay all this, for the government to reverse their decision? Also valuable to consider the repercussions of transferring to an LTD company, when it comes to selling the property.
-What to do about any future property purchases? Simply put, Always buy under a limited company as section 24 does not currently affect this.
- Seek opportunities and look for ways to help people, and perhaps make some profit from them. If a person decides to sell all their properties, they are only entitled to defer X amount of capital gains (£12,000 per person per 2019 financial year- this differs each year). If you are able to secure a deal to purchase each of their properties individually each financial year, this could save them money in capital gains.
- To summarise, seek professional advice in terms of your personal situation. It may be valuable for you to stick with your current situation and continue having the properties in your name, however, it could also be a benefit to have your properties transferred into a Limited company.
BEST MOMENTS.
“If you have a small mortgage with a good profit, you might not want to do anything”
“if you do have properties in your name and have mortgages on them, then it is very possible that you will see a significant rise in your tax bill. “
“If you own property in your own name and have no mortgage on them, then section 24 will not make any difference to tax that you pay on your business.”
“You could end up doing all this, only for the government to turn around and reverse their decision”
“Is there an opportunity to take advantage of those who own in their personal name? Absolutely!”
VALUABLE RESOURCES:
https://www.upad.co.uk/landlord-calculators/section-24-tax-calculator
ABOUT THE HOST
Kevin McDonnell is a Speaker, Author, Mentor & Professional Property Investor. He is an expert when it comes to creative property investment strategies. His book No Money Down: Property Invest talks about how to control and cash flow other people’s property to create financial freedom.
CONTACT METHOD
Kevin McDonnell Facebook Kevin McDonnell website Progressive Property