11 ways landlords can combat Section 24 tax changes
By Carl Agar
Despite repeated warnings to the Government about the reduction in the availability of private rented properties, increased rents and ultimately an increase in homelessness, Section 24 is more than just here to stay – it’s already kicked in (albeit gently to begin with).
The abolishment of tax deductible expenses for mortgage interest payments - at an increasing rate over the next four years has already seen many landlords leave the sector, or at the very least start on formulating their exit plans.
But if you’re a landlord in the high rate tax bracket and you are in this for the long haul, then stop a minute and read on while I talk you through a few approaches that can help combat those tax changes. If you’re lucky you may pay no more tax at the end of the four year Section 24 roll-out than you do today:
1) Become a limited company tomorrow. Why? Because it’s only individuals or ‘unlimited’ partnerships who can’t claim for mortgage interest relief. As a company you’re entitled to continue to claim for such expenses and you’ll pay corporation tax which is being cut from 19% this year to 18% in 2020. You do need to be careful with this approach as you may get caught with capital gains tax.
2) Beneficial Interest Company Trust. Speak to a good financial advisor and ask them about putting your properties into a Beneficial Interest Company Trust; you should not need to re-mortgage as you will transfer the interest but keep the mortgage in your name. You will then pay corporation tax and not income tax, which is lower. This is a complex approach and should only be carried out by experts, be careful as the professional fees for doing this can border upon extortionate!
3) Remortgage. Interest rates are historically low, even for buy to let mortgages, so if you have a lot of equity then start hunting around for a better deal. By achieving reduced monthly payments right now you can mitigate those tax penalties before they even start to kick in!
4) Alter the division of profits. If you’re in business with a partner (such as a spouse or other family member) and they are in the lower 20 per cent tax bracket then get them to take the larger share of the profit for tax purposes. Do the same if your other half is unemployed; bring them into the business.
5) Pay the mortgage off. If you can pay the mortgage off it means, of course, that you’ll avoid the extra charges since there will be no mortgage to pay interest on in the first place.
6) Make more gift donations. This can prevent you from going up to the next tax increment - especially if you’re currently hovering around the threshold of a high rate tax payer.
7) Make higher pension contributions. Another way to avoid becoming a higher rate tax payer is to put more money in to your pension, thereby staving off the high rate tax bracket for longer.
8) Increase rents. Putting up the rents for your tenants could cover the additional costs the government have landed you with (ministers can’t say they weren’t warned). Just make sure the additional income doesn’t push you over into a higher tax bracket.
9) Sell off some property. Do you own a couple of properties that you could offload, perhaps they are poor performers? Then maybe it’s time to get rid. The money you get from the sale could be put towards paying off the mortgage on those much better performing properties.
10) Add some diversification to your strategy. Start keeping a look out for commercial properties to add to your portfolio of rental homes. Shops, hotels, cafes aren’t hit in the same way with the loss of mortgage interest tax relief. In fact, Section 24 doesn’t even apply. A diversification strategy can prove to be a great safety net.
11) Buy only high yield properties. Of course, we all want to purchase an investment that will bring us in a healthy profit, but with the cuts to interest relief it’s more crucial than ever that we buy right!
What about you? Have you come up with an ingenious plan to avoid the crushing ban on mortgage interest tax relief for landlords? If so, why not share it with us here.