The New ‘Tenant Tax’ Is Here, But Many Landlords Are Unaware of It

To the dismay of many private landlords around the UK, the government has now brought in the controversial Section 24 ‘tenant tax’ that may result in reduced incomes. As a result, some landlords are reportedly getting out of the rental business altogether, while others remain blithely unaware of the changes in tax relief that are being staggered over a number of years.

Those affected by the tenant tax are UK residents who let out residential properties at home or abroad, as well as people not resident in the UK who let residential properties in Britain. People who rent residential properties under a partnership agreement will also be subject to the new tax code, as will anyone paying income tax on profits from properties, such as a beneficiary of a trust or a trustee.

Section 24 does not apply to companies operating in the rental sector, whether based in the UK or not, and people renting holiday flats and houses are also exempt (the premises must, however, be fully furnished in order to be in compliance).

Essentially, what it means for most private landlords and landlord agents collecting ongoing rents from tenants is that restrictions on tax relief for finance costs such as mortgages, loans and overdrafts will be scaled back from April 6 this year to April 6, 2020. From now until 2018, 75% of finance costs can be deducted from rental income for tax purposes. From April next year, it will be 50%; that’s slashed to 25% from 2019 to 2020 — and then zero.

All Change (for those in the know)

However, despite all this tax upheaval affecting landlords, almost 1.5 million of them don’t know what their new obligations are. That’s according to the results of a recent poll showing that a massive 70% of UK landlords were not aware of what’s about to come.

For those landlords and landlord agents who have been following the incoming legislation and what it might mean for them, the answer may be bleak. Some are worried they may have to raise rents to cope with the tax changes, while more believe they may be forced to sell up entirely and evict their tenants in the process.

Indeed, according to one report, a growing number of landlords — fearing bankruptcy if they remain in the rental business — are getting out of the once-promising and vibrant buy-to-let sector. Research shows that up to half of private landlords may leave the market by 2020, with some planning to sell off their rental properties, others slashing their portfolios and still others changing to commercial property that won’t be affected by the new tax law.

Call for Abolition

A group campaigning against the new tax measure, set up by two landlords, says this kind of tax structure was trailed in the Republic of Ireland, but proved disastrous and was subsequently not introduced. It wants it repealed.

“The tenant tax is ludicrous legislation that will result in rents for affordable homes increasing substantially, as evidenced by two failed experiments in Ireland where a very similar tax was reversed because they led to very substantial rent increases,” the group, Axe the Tenant Tax, says.

As long as Section 24 remains on the statute books, however, landlords who stay in the game will be looking for ways to slash their overheads and maintain or even grow their rental incomes. One way many are doing just that is by using the services of an agent to manage their properties. It could result in savings that might offset the heavier tax burden. Deciding to work with a landlord agent in Hammersmith or just about anywhere in the country could be a sure-fire way to remain in the residential rental business and become more profitable.

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