What is Clause 24?
George Osborne unveiled a shock tax change in 2015 which will remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect, the Chancellor wants to tax landlords on their turnover rather than profit, meaning that tax will be payable on nonexistent income.
In addition the "wear & tear" allowance is to be removed, after 2016 investors can only deduct actual cost of replacing furnishings.
Clause 24 Start Date
To give landlords time to adjust HMRC will introduce these changes gradual from April 2017 over 4 years.
- 2016 Wear and Tear allowance removed. Only actual costs for replacing furnishings can be deducted.
- 2017, April Mortgage Interest Relief is being cut for Landlords
- 2020, April the maximum relief will be restricted to the basic rate (regardless of tax bracket)
Who is effected?
- Higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.
- Basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.
- Very wealthy landlords who do not need mortgages will be untouched.
- Tenants may see landlords giving eviction notices. As they sell as the Chancellor makes there business into a monthly loss. Others may see rents rise as Landlords look to cover rising business tax overheads.
Clause 24 Example:
Clause 24 Calculator
How to avoid Clause 24?
We can not give tax advice, so talk to your accountant, we have seen accountants recommendations. You can take use these as discussion points with your accountant:
- Keep Already Owned Properties in personal name. After SDLT, Capital Gains Tax and Higher Interest Rates - you may be paying more to "avoid" the tax.
- OR Big Landlords can move already owned properties into company. Regardless of SDLT and other tax's over the long period investment, it may be wise to cut losses now rather than wait and transfer later.
- Buy New Properties In Limited Company. Limited company's will continue to pay tax only on profits, they can "retain profits" in the company instead of paying out to you, corporation tax is lower for than individuals. New dividend tax allowance will be increased.
- Change from Joint Tenants (50/50 ownership) to Tenants in common (99%/1% ownership). To spread the Tax, decreasing one persons taxable income and increasing another persons.
- Beneficial Interest Company Trusts - To avoid refinancing when putting properties into a company.
- Incorporation Relief - If your property business is a business (learning from Ramsay vs HMRC (2012)). You may qualify for "Incorporation releif". Which means the tax can be deferred until the new shares in the new company are sold
If you take any of the above to your accountant as a basis of a discussion, find a route to lower your tax liabilities if possible and discuss with your mortgage broker on how to implement your accountants recommendations.
How are Landlords fighting back?
Landlords have launched a self funded (donate here) legal campaign, that has initially reached £50,000 in funds and a "pre-action protocol letter" to the government .
Founded by Steve Bolton & Chris Cooper this has evolved in a Judicial Review of Clause 24 and spawned the nick name "Alice in Wonderland Tax Grab".