How To Beat Section24 And Save Tax
The hot topic in recent times for a lot of landlords has certainly been Section24. When the changes were initially announced, the one small comfort was that the changes were still a long way off, with plenty of time to plan. But, time moves fast, and when landlords began completing their 2017/18 tax returns last year, they started to see the impact, with an even greater impact this year when completing their 2018/19 returns.
Since the changes were announced, we are seeing a lot of clients here at RITA4Rent looking at their wider options when considering future purchases, as well as reviewing their portfolio generally.
In this feature, we shall look at a selection of considerations and provide a brief overview of each.
Furnished Holiday Lets:
Since Section24 was announced, Furnished Holiday Lets (FHLs) have grown in popularity. Furnished Holiday Lets benefit from being classified as a trade, and therefore, they attract different and more favourable treatments compared to standard buy to let property. This classification means that FHLs are not affected by Section24, and therefore mortgage interest and finance costs continue to be allowable deductions.
Operating this trade also opens the possibility of favourable reliefs such as Rollover Relief, which potentially allows you to defer CGT, as well as entrepreneur’s relief. You may also be able to deduct capital allowances and the annual investment allowance on certain purchases.
However, it can be a bit of a lottery to ensure your property meets the strict conditions to be classified as an FHL. There are 5 rules, which we summarise in the following table:
If you fail to meet the above criteria, this can result in being treated as operating a standard buy to let. However, there are two elections named the averaging election and the period of grace election which may help counter this. If they do not, then care must be taken, as there may be other consequences, such as balancing charges among others. Care must also be taken at start up and cessation.
This is a very brief overview, and professional advice is recommended should this area be of interest. Not least, added complexities can arise regarding losses, VAT, IHT as well as stamp duty.
Property Development to combat Section24:
We are also seeing a growing interest in individuals exploring property development. As with FHLs, this type of activity is classified as a trade and so unaffected by Section 24. The first notable difference between development and buy to let activity, is that profits from property development are charged to income tax and national insurance, with no exposure to the Capital Gains Tax (CGT) regime. Landlords are therefore unable to benefit from the CGT annual exemption, nor other CGT reliefs such as PPR and Lettings Relief. Also, the actual rate of CGT may be lower, as potentially this could be chargeable at 18%.
Accounting for stock can be a complex area when completing a tax return for property developers. As a very basic overview, development property purchased is classed as stock in your Balance Sheet. A lot of costs which property developers may treat under standard BTL rules as revenue costs, may instead be added to the stock value in the Balance Sheet, with the deductions strictly being realised on sale. When the developed property is sold, the stock value is reduced accordingly, with tax and National Insurance paid on profits. The key is that stock should be valued at the lower of cost or net realisable value. Many costs can be claimed on your tax return, such as insurance costs, repairs and renewals, finance costs (as mentioned earlier), administrative costs, potentially capital allowances, amongst others. In addition, there may also be claims available for costs incurred if a sale falls through.
Again, this is a very brief overview of a very complex and detailed area, and advice is recommended.
Limited Company to combat Section24:
The big draw of purchasing buy to let properties in a limited company is that you would not be exposed to the Section 24 changes. There is also the attraction of potentially lower rates of corporation tax, with further reductions in the rate coming up. The reinvestment of profits within a company would expose you to corporation tax, but extracting profits could expose you to other taxes, so planning is important. If you have a Directors Current Account credit balance to draw from, this is less of an issue as you may draw from this free of tax. If not, then extraction is often in the form of salary or dividends, with the latter requiring added consideration due to the recent dividend changes. Again, there is a lot to this area, and many pros and cons of operating as a limited company, and advice is highly recommended.
Overseas Investment to combat Section24:
There is the potential of investing in overseas property with the aforementioned classification of a Furnished Holiday Let, but this would have to be located in the EEA. This would have similar benefits as mentioned earlier on FHLs.
Purchase of commercial properties to combat Section24:
The Section24 changes affect landlords letting residential property, and therefore, commercial property would be unaffected. Whilst this can be a consideration for tax purposes, from a practical point of view, letting commercial property and letting residential property are not the same, and would be a very different experience.
Going further still, in the right circumstances, it is certainly possible to utilise a company as a property management vehicle and, provided the arrangement is on a commercial basis, this can shelter a percentage of rental profits from a higher rate of tax. Of course, it is less viable if the charges exceed the VAT threshold. We have touched upon Incorporation Relief and Partnerships in the past, but again, this is a very complex area, and ultimately tax advice should be taken to ensure you are making the right decisions for the right reasons.
Whilst for some landlords there are solutions, for others less so, and if the latter is the case, at the very least, preparations should be made so as to know how your tax is going to be affected. No two taxpayers’ circumstances are the same, and whilst some of the above will help landlords, for others it will not. It is a case of reviewing your circumstances, reviewing your strategy, and then making the decisions to benefit you in the future, not just from a tax perspective, but from an overall perspective.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.