This blog post is probably long overdue.
Actually, it’s definitely long overdue according to the surge of emails I’ve received over the last several months, from people with a profound passion for the letting industry, urging me to reach out to ‘you lot’ so we (landlords) can all band together to fight against a seemingly dogshit tax change, which many believe will cripple the letting industry.
Oh, so dramatic!
I was always going to discuss the new Section 24 tax legislation at some point, but despite how inevitable the discussion is, delaying it was a stroll in the freaking park. Case in point, I chose to blog about Garden Fence Law before blogging about the new tax legislation, so you can only imagine how far down the pecking order it was.
So, I’m going to do the right thing by everyone and spread the word! But, I’m going to avoid going into the lengthy technical details of the ‘Section 24’ tax changes, because quite frankly, they’re boring as shit; it involves a lot of nasty stuff like maths. I think I’ll stick to the basics, or at least, what I feel are the ‘essentials’. But don’t worry, I’ll provide links to other useful resources, where you can read more of the snoozy-details, so at least you’ll have the option of boring yourself to death.
Quick overview of what the ‘Section 24’ Tax change means…
- Landlords used to be able to offset the interest paid on their mortgages against profit, that is no longer the case.
- The Government suggests 1 in 5 landlords was affected by the change.
- The restriction was introduced in April 2017, and it will be fully implemented by 2020 – 2021.
- The tax relief on mortgage interest is capped at 20% even though you might be a higher rate taxpayer.
- Lower rate tax payers may find themselves pushed into a higher rate of taxation due to the change.
- This will mostly affect landlords with large mortgage debts, especially ‘portfolio’ landlords. It’s theoretically possible that some may find themselves paying more tax than they have actual income. Scary!
Will YOU be affected by Section 24?
Meh, I dunno.
I hope not.
If you’re a upcoming, new or seasoned landlord, you really, really, really should find out if you haven’t done so already, and then make any necessary provisions. My advice is to talk to a specialist landlord tax accountant to find out how much of an impact Section 24 will have on your finances, and then plan accordingly.
A closer look into the Section 24 clause and how it works
As part of the 2015 Summer budget, the Chancellor of the Exchequer, the pompous twit George Osborne, announced that from 2017, the Government will progressively stop landlords from being able to use the full cost of our mortgage interest payments as an expense to offset against our tax bill, which ultimately means many private BTL landlords will see their tax bill go through the freaking roof!
So, let’s suppose you receive £1,000 PCM rent for your BTL. £600 goes towards the mortgage payment; £400 of which goes towards paying the interest of that mortgage, while the remaining £200 reduces the capital. Based on the old rules, you could offset the £400 interest payment as an expense, which reduces the taxable net profit, and rightly so.
However, the new tax changes means we will no longer be allowed to offset the interest on mortgage payments! It will be added to the taxable net profit.
Needless to say, that’s a frightening change, because for many of us the interest on mortgage loans is our biggest expense, and the main tax deductible expense which allows us to be profitable. OUCH! How about that for a kick in the gonads?
Why are landlords in upheaval about this legislation? It’s not just because the increase in tax will take a sledge hammer to our profits, but it’s also because this legislation is only being applied to individual landlords, while every other type of business in the UK will be able to continue off-setting their total costs against their income before being taxed on their profit. Even corporate companies that manage large portfolios of real estate, who are effectively landlords, won’t be subject to the new legislation, so in true Tory style, they really are going after the little guys, while keeping the rich… rich.
IT’S A DARN RIGHT OUTRAGE, ISN’T IT? HOW COULD THEY?
Holy Mackerel, I need to calm the hell down. I almost gave myself a nose-bleed. *deep breaths*
The effects of Clause 24
As a result of this new legislation, many thousands of landlords will find themselves being taxed on loss-making buy-to-let properties and see massive increases in the percentage of tax payable. Many will be shoved upwards into a higher rate tax bracket, even though in reality they will not be making a single penny of extra income!
It should also be noted that the Government already collects tax on the mortgage interest paid by landlords – it takes it from the profits made by the mortgage lenders. So not only does the legislation victimise individual mortgaged landlords, it’s also a double taxation policy.
And of course, inevitably, as it always does, these extra costs will quickly find their way filtering down to the bottom of the chain, all the way to the tenants, which will further increase rental prices in an already unmanageable market.
I refuse to believe the Government aren’t aware of how this will pan out, because it really just boils down to basic economics (i.e. if you increase production costs, the retail price of the commodity has to increase), so it kind of makes you wonder who screwed who to make this ludicrous legislation happen. Others feel the same, and that’s why they’re calling it the “Tenant Tax”
Landlords are trying to overturn the legislation!
You may or may not have heard, that a couple of months after the budget was announced, a couple of, perhaps hopelessly delusional, landlords banded together, looking for support and donations to kick-start a legal process with the ballsy ambition of overturning the proposed ‘Section 24’ by a Judicial Review.
Credit where credit due, they certainly put up an admirable fight; they managed to get the backing of some moderately influential political figures and raised a smidgen over £100k. Not bad by anyone’s standards.
Alas, to date, those efforts appear to have been futile, because there’s been no real positive progress. Actually, that’s probably an understatement. Most significantly, back in October 2016, the High Court refused the Judicial Review. However, the fight doesn’t seem to be completely over, because as always with failing ‘movements’, there are inevitably a couple of loiterers that simply refuse to let it go. Good luck to them, sincerely. Regrettably, I can’t help but feel they’re the same as those optimistic piss-heads that crowd, harass and get rejected by the same women over and over. We’ve all been there.
While I was (and still am) in full support of the campaign, I have always been profoundly pessimistic about any one or thing being able to stop the Tory Government from extracting extra ‘much-needed’ funds from our coffers. Landlords are an easy target, especially while the vast majority of the ‘renting’ working-class despise us. The Government know exactly what they’re doing, and they’re well aware of the fact that there aren’t too many civilians worrying about us ‘poor landlords’. So my stance has always been simple and clear, and that is to prepare for the surge in tax, as opposed to hoping and waiting for it to crumble.
Prepare for the worst. Always!
I’ve a read a few articles on the new tax legislation by various reputable letting/landlord outlets, all emphasising the catastrophe that is Section 24, and how we should all huddle together, hold hands (I’ll probably be lumbered next to some grotesque asshole that doesn’t use hand sanitizer, great), sing ‘Kum Ba Yah’ and support the fight against the powers that be. Apparently this will be the biggest fight of our lives.
Like I said, dramatic.
While the legislation will, for sure, affect most of us, I sense there’s an element of total irresponsibility surrounding the issue. While everyone is focusing on rallying the troops to overturn the legislation, there seems to be a distinct lack of pragmatic thinking!
Right, so let’s be real about this…
I don’t know the facts or figures, but I can imagine that the amount of legislation that have been overturned in similar situations remains in a singular digit. I’d go as far as to say it’s unheard of, so the idea of getting Section 24 revoked seems woefully optimistic.
Let me clarify something important…
The primary goal of this blog post isn’t even about the new tax legislation. Fuck the legislation in the ass! That may displease the Church Elders of the letting world, as they probably would have preferred me to optimise this page gather momentum to overturn the legislation, but I believe there’s a bigger and more important message to spread!
The primary goal of this post is to enforce a friendly reminder to everyone, including myself, that we should always expect and prepare for any economic change, including the Section 24 tax legislation.
Ironically, while the tax change doesn’t treat us like any other business, we need to respond like any other business, and that is by adapting to the market. Don’t sit idle and wait for the storm, because you’ll probably drown with your shrivelled-up pecker in your hands.
The reality is, if this storm does drown you, it won’t be because you failed to support or stop this one particular legislation, it’s because you sat and waited until it was too late. This added tax costs is nothing new as a ‘concept’, it’s merely another expense among hundreds of others, albeit, an insanely unfair one.
The thing is, even if Section 24 gets overturned in the future, another evil will inevitably rear its ugly head with the same intent; looking to diminish your profits, whether that be on a domestic level (e.g. the need to replace a boiler) or another mass scale attack against landlords and the industry. We won’t be able to fight every fight.
Yes, the tax legislation is a sizzling pile of shit and I wholeheartedly believe in fighting it. But the pragmatist in me is urging everyone to spend the ‘majority’ of their time trying to absorb the cost, as opposed to fighting it.
Absorb & adapt to the market
My advice? Talk to a specialist accountant that is familiar with landlord tax, and find out how much of an impact Section 24 will have on your finances, and then plan accordingly. Do the maths, and stress-test the figures. Just make sure you’ll be safe if shit hits the fan. Trust me, if you prepare and embrace the tax change, you’ll be happy whether the legislation gets revoked or not.
I’ve already written several posts on how landlords can save money, which may help you reshape and maximise your profits. But I’ll go over a few of the main one’s below.
While you should already be doing the following regardless, for both short and long term gains, I appreciate we don’t all start swimming until we’re thrown into the deep end…
*The Landlord kicks you into the deep end*
It’s still a massive mystery to why so many homeowners (not just landlords) don’t look at remortgaging at every given opportunity. Relatively speaking, it’s by far the easiest and quickest way to massively rein in the outgoings!
Even if you can find a mortgage product that offers a puny 0.1% reduction in interest, you could still potentially save thousands, and therefore instantly absorb the costs of the repulsive new tax legislation in one hit!
If you’re interested, here’s a more detailed write-up of my most recent experience of remortgaging a BTL.
Make a lump sum payment to reduce mortgage
You never know, reducing some of your mortgage debt with lump-sum payments may work out better for you. Equally, it might be worth switching to a repayment mortgage if you’re currently paying interest-only. This is where a good tax accountant will be invaluable.
Regularly look for better deals
I honestly believe most landlords miss a trick when it comes to service renewals (i.e. insurance, agency fees etc.), and that’s mostly due to obscene levels of laziness.
Companies that work on the premise of annual subscriptions prey on laziness. They rely on people to avoid the 10-20 minute chore of looking for a better deal when it’s time to renew a policy, which is typically once a year. The sad reality is, most people are THAT lazy, so they just go ahead and renew the policy with their existing providers.
9 out of 10 times, you’re existing provider won’t be offering you a competitive deal. They’ll be offering you the “lazy asshole” deal, which is usually 30% more expensive.
Last time I shopped around before renewing my landlord insurance policy I saved £250, and it took about 20mins.
PLEASE, just shop around when it’s time to renew! Do it for me and your children.
Minimize void periods
Be organised and minimize void periods in-between tenancies.
Think about it, by simply slowing down the process of finding new tenants by 2 weeks, you can easily lose £400 in rent (based on rent being £800 PCM). Even if you half that period by working a little quicker, you’ll save £200. It really does boil down to being organised and prepared.
There’s more information over at the finding tenants quickly section!
Obey the law
This is a bit of a quirky one, and perhaps it has no place in this list. But screw it, I’m doing it…
Landlords are continuously being persecuted for failing to comply with the law. Actually, this is probably one of the quickest way to vapourise profits into a puff of smoke, and it’s definitely more devastating than any tax clause.
Be a good boy, comply with your landlord legal obligations if you aren’t already. It’s so much cheaper than being sued.
Avoid & prepare for bad tenants
See, the thing is, while this whole tax legislation is unfair and will jeopardise your monthly Range Rover lease payment, one asshole tenant can jeopardise your entire fortune.
Reduce the chances of harbouring donkey tenants by undergoing thorough tenant referencing. But just as crucially, always prepare for donkeys (because some times they’re just unavoidable) by keeping tenancies short, having a tenant and considering RGI (Rent Guarantor Insurance).
Let me illiterate, good tenants are crucial to turning a healthy profit. You will NEED good tenants to help you through the tough times.
Minimize tenant turnover
The most important point in the list, in my opinion.
If you have good tenants, don’t do anything stupid like unnecessarily increase rent. Keeping rent reasonable/low in exchange for retaining good tenants is almost always cheaper than pissing off good tenants and giving them a reason to terminate the tenancy.
Despite popular belief, increasing rent isn’t the best way to survive in a tough environment. The best way to survive is keeping the cashflow steady, and you cannot do that without good tenants. I’m not saying don’t increase rent, I’m saying you might be better served being ‘reasonable’ over brash.
Scale back if you’re struggling
If you’re fortunate enough to be a portfolio landlord, it might be worth selling a few of your properties and using the capital to reduce mortgage debt on the remaining. It’s a move that will undoubtedly be a kick to the ego to those that like accumulating, and it is a gamble, because the legislation might get squashed. It’s your call.
It is extreme, but so is bankruptcy. There’s also a lot to be said about coasting through life in comfort as opposed to fear.
Offset every expense like your life depends on it
Stack up every expense you can against your tax bill.
While you may lose the ability to offset your interest payments, there maybe other expenses that you can offset, which you currently aren’t e.g. the cost in fuel for going back and forth to your BTL, the cost of your PC which runs your landlord software on, even the cost of communicating with your tenant and/or agent, and the food consumed during renovation periods etc. Again, a good tax accountant will let you know what you can get away with. The really good accountants will manage to find a way to offset pretty much anything, including a pair of nail-clippers.
Offset every last fucking penny.
Operate as a company
According to this article on ThisIsmoney it might be worthwhile operating your portfolio through a company if you have 10+ properties, because you’ll benefit from company tax breaks that are otherwise unavailable to private landlords. But bear in mind, there are added costs and hassle associated with running a company.
Again, a good accountant will be invaluable here!
If you’re not doing ALL of the above (which is only the tip of the iceberg), I have no doubt in mind, you’ll be able to find ways to absorb more nose-bleed costs than your balance sheet is currently showing.
Workout how much this tax change is going to cost you, and make the changes you need to make in order to absorb the shit out of it.
Why I’m not worried, and perhaps lack empathy
If you made it this far, you maybe getting mixed signals, and wondering what side of the fence I’m on. So let me explain:
- I want landlords to be aware of the tax change and make sensible preparations.
- I don’t think it’s sensible for landlords to rely on the legislation getting overturned.
- I want landlords to focus on being prepared for any change, not just the incoming tax change.
- In this very specific situation, I think it’s fundamentally more important to ‘prepare’ than ‘fight’.
- I want landlords, particular new landlords, to realise the concept of unforeseen expenses, even unfair ones, is the nature of any business. The concept of a ‘new expense’ is nothing new.
- The amount of risk your open to will depend on how you have invested.
I’m going to touch on my last point in a bit more detail, although I’m not sure if it’s the right time or place, because it might be like rubbing salt in the wounds. My ex-girlfriend always used to tell me there’s a time to listen and there’s a time to point out mistakes, and I never knew the difference. Needless to say, I dropped her like a bad cold! What an absolute PMS’ing bitch, right?
I want to emphasise, the impact of this tax change will affect a very specific investment strategy the hardest (it’s the same strategy that almost always gets walloped when extra costs incur)!
I’ve discussed my investment strategy in detail before; it’s an extremely low risk strategy, and the nature of its design is to withstand volatile climate changes. In short, I try to reduce debt as quickly as possible in order to buy outright, so I put down lumpy deposits and make overpayments when I can. It’s not the most profitable model, but it’s quite safe. It’s a reasonable model to stand strong against the tax legislation (i.e. smaller the mortgage debt, the smaller the interest payments).
That’s why I’m not worried about the tax change on a personal level. Yes, the legislation is unfair, so I’m going to help fight it, and it will painfully eat into my profits, but I’m prepared for the change and I can absorb it, while still turning a profit that makes my investments worthwhile.
Let’s not kid ourselves… this change is going to affect ‘portfolio landlords’ that are up to their eyeballs in mortgage debt the most. Their main objective, at some point, was to expand as quickly as possible with very little equity, and mostly rely on property prices increasing. It’s a flimsy model, which by nature is fundamentally prone to topple rather easily. If you’re going to play that game you need to take responsibility. That said, us landlords shouldn’t be victimised, and I’m on the same side as those with whimsical house-of-card type portfolios, even though I think they’re freaking insane for walking down that path in the first place.
If anyone has any thoughts, comments… you know what to do, grab the mic! It’s appreciated as always, and I’m genuinely curious about the following:
- 1) Were you aware of the new tax legislation?
- 2) are you going to support/donate to the campaign?
- 3) how is the legislation going to affect you?
- 4) have you made any preparations for the change, or are you going to? I know of a few landlords that are currently scaling back their portfolio, and taking advantage of the insanely high property prices!
So, that’s me done for another month or so, or whenever the mood next strikes. There’s no real pattern, other than obscene amounts of coffee and boredom-endued suicidal thoughts.
Goodluck everyone! Power to the people! x
Disclaimer: I'm just a simple landlord blogger, I am not qualified to give legal or financial advice. Any advice I give is my opinion based on my experience, and is never legal or professional advice. You should always get professional advice on any legal and financial matters!