Unpacking Section 24 and how it will impact landlords

In the past, landlords were able to deduct the full cost of their mortgage interest payments on their rental properties before they had to pay tax – this is no longer the case. As of April last year, mortgage, overdraft and loan interest costs cannot be taken into consideration when calculating your taxable rental income.

This is due to the amendment know as Section 24 of the Finance Act (No.2), dubbed as ‘The Tenant Tax’. Changing the Generally Accepted Accounting Principles (GAAP), the amendment will change the way that profit is calculated on rental portfolios in the UK. It applies to all UK resident landlords with residential rental properties situated in any country worldwide, any non-UK resident landlords with residential rental properties in the UK, and any trusts or partnerships with a residential rental portfolio.

Who will be most affected?
Those who will feel the impact of the change the most will be landlords with high-loan-to-value portfolios, who currently have a rental yield of 4% or lower. Essentially what the amendment will do, is push certain landlords into a higher tax bracket despite the fact that their income has not changed or increased. If the landlord is already dealing with a marginal rental yield of below 4%, the result could be that the run into a negative cash flow situation and financial distress.

Landlords who have a buy-to-let mortgage in the 40% to 45% tax brackets will pay more tax, while those in the 20% bracket might pay additional tax if their gross income, which is their rental income inclusive of all other revenue streams is higher than £45,000.

It is important to bear in mind that landlords will be reporting an inflated profit on their tax returns, which could impact their eligibility for child benefit, tax credits and increase any student loan payments.

Gradual implementation
Thankfully the changes will be phased in over a period of four years from 6 April 2017, with the full brunt of the change only fully being felt on 6 April 2020, giving landlords some time to decide whether they wish to remain in the rental game or sell up. By 2020, all finance costs will only be restricted to a 20% tax relief.

What to do next?
Landlords who want to hold onto their rental properties will require cash flow. They will also need to ensure they have a decent buffer so they don’t run into financial difficulty that forces them to sell. Ideally, as the first point of call , speaking to a knowledgeable tax adviser who understands property will be their best bet for successfully navigating the Section 24 road ahead.

For more information regarding Section 24 or ways to reduce the financial impact, contact RE/MAX London at [email protected]

Buying a home – It’s an emotional journey

While the majority of home buyers will generally have a checklist of must-have features such as the numbers of bedrooms, bathrooms, amenities in the area and commute to the office, often it is emotions that drive home purchasing decisions and not the facts. For many home buyers, the decision comes down to how they feel when they first walk into the property.

Ideally, buyers should err on the side of caution when purely basing their decision on emotion, as this could turn around and bite them in the future. While it is natural to have an emotional response when going through the process, it is crucial that emotions are not the only reason that certain decisions are being made.

As buyers move through the home buying process, there are four emotions they are likely to experience. Understanding these emotions and keeping them in check will help you to remain level headed and buy the best possible home.

Owning a home is an amazing milestone that many aspire to, so it seems only natural that the initial emotion would be excitement. If you are just starting out your home-buying journey it is likely you are in the dream phase of the process and searching for properties online. In these early stages, you will start to figure out what you like and what is available in the current market.

The start of the journey is an ideal time to sit down with a financial adviser or your bank to discuss budget and affordability. Another great resource is an estate agent who will be able to guide you through the steps of buying a property, along with the costs associated with buying a home, such as stamp duty, valuation fee, mortgage costs, and legal fees to name a few.

If you are a first-time buyer, there is a vast amount of information to ingest during the initial stage of the search. Apart from the various listings you will be viewing, there is also the matter of calculating finances, and preparing to move to a new home. The masses of information available and the number of decisions that need to be considered can be overwhelming.

You might start out with an idea of what you are looking for, but after seeing property after property, it is possible to lose sight of the initial vision. Having a clearly defined list will help to stay on track and narrow down the search. There are a few other ways that will help you keep tabs on all the properties to compare them:

• Write notes on each property viewed – this can be done using a smartphone, tablet or the more traditional pen and notebook. Make a list of the pros and cons of each property.
• Take photos – this can be done with the camera on your phone.
• Keep the records of properties you are really interested in and discard the others.
• If you have any inquiries, talk to the agent who showed you the property. They will have a record of the homes that they have shown you and will have a list of each property’s features.

Once your decision is made and you are moving ahead with purchasing the home, you are likely to start feeling stressed out. Buyers are often anxious to get through the process as quickly as possible so that they can move into their new home. During this time is it important for the agent to explain the legal process while providing an estimated time period that each stage of the process will take.

Often buyers feel a sense of accomplishment and fulfillment once they have made it through the process. Owning a property can provide you with a sense of security, as well as a cornerstone for building wealth, provided the right decisions are made from the beginning.

Understanding the home buying process and the emotions that accompany it will assist you to make decisions that are based on the facts and not just your heart.