What is Section 24
In the Summer budget 2016, George
Osbourn announced the introduction of The Finance Act (No2) 2015, Section 24 of
this act impacts ALL individual landlords who have mortgages will from April
2017 this will restrict mortgage
interest expense deductions for private landlords to the basic rate of tax
The hugely important and
Generally Accepted Accounting Principle (GAAP), where INCOME minus COSTS equals
PROFIT, will no longer apply to individual buy-to-let landlords with finance
costs.
put, Section 24 will mean that
most landlords will have to pay extra tax of 20% or more of their annual
mortgage interest and other finance costs. The tax they pay may be greater than
their real profit, leaving them with a rental loss and a cash shortfall.
And it’s likely to move vast
numbers of landlords into the higher rate tax bracket, while simultaneously
losing them their tax credits and personal tax allowance.
On 6th October 2016,
Cherie Blair QC represented landlords in The Royal Courts of Justice to request
the law be overturned
----The hearing failed
Landlords have already been hit
this year by the removal of the annual wear and tear allowance, which allowed
landlords to claim back the cost of items they had to replace in a furnished
property
Impact on tenants
The impact will be devastating
for the Private Rented Sector (PRS) The National Landlord Association estimates
this law will impact over 314,000 landlords with an estimated 630,000
properties being effected.
Smith Williamson Specialist
accountants have calculated that landlords would need to increase rents by at
least 5% to counter the impact of S24
The increase in rents will effect
all tenants, both employed and in receipt of benefits, however it is unlikely
that tenants will be able to afford these increases. Those working will not see a wage increase
DWP Quarterly Benefits Summary - At
August 2015, state there were 4.79 million recipients of Housing Benefit, of
whom almost three-quarters were aged under 65. The average weekly amount of
Housing Benefit was £95.30.
86.8% of the 1.53 million Private
Sector Housing Benefit recipients were receiving the Local Housing Allowance.
All of these households have the
potential to lose their homes because they will not be able to afford the
expected rent increases.
Social Impact
Millions of people face the very
real likelihood of being made homeless if rents are increased, the main reason
for this is Housing Benefit will not be raised in line with this mass increase,
Housing benefit or LHA is only calculated once a year on 15th
January by Valuations Office Agency VOA, these calculations are based on the 30th
percentile of rents in the Broad Rental Market Arear BRMA and the existing LHA
rate.
Tenants who have their rent
increased in April 2017, will not see an increase in their housing benefit
until at least April 2018, resulting in many being evicted for rent arrears, an
issue that will bring its own problems as tenants will find their credit
impacted as will as having a ‘black mark’ against them for leaving a previous
property in arrears
Although this new regulation does
not effect landlords who do not have a mortgage or are incorporated in someway,
it is extremely unlikely that these landlords will be happy to sit back an
accept lower market rents while others enjoy increases, the obvious knock on
effect is all landlords will increase rents to set a new high market rate,
which will be completely unaffordable to most, even if they are in full time
employment.
This will result in many homes
sitting empty it has priced people out of the market and a huge increase in
homelessness.
So what is the answer?
If only it was that simple… the
sensible thing to happen would be to bring S24 in to force in April 2017 but
only for New BTL properties from that date on, this way landlords can go into
buying a property with all the facts and their eyes open.
At present, many existing
landlords will be blindsided by this new legislation and in fact could risk
losing their own homes as their personal mortgage may rely on rental income and
a huge tax bill could push many owners into debt.
