How One Married Couple Beat the Tax Changes
Since the introduction of Section 24, many landlords have restructured property ownership to protect themselves against tax changes, however this doesn’t necessarily have to involve a change of ownership.
REFINANCING
In the case below, it was refinancing that paid off the tax changes and more. Refinancing is the process of trading in your old mortgage for a new one. An extra amount of equity will have been built up if the property increased in value.
Unfortunately, the window on refinancing to beat the tax changes is rapidly closing due to the Bank of England’s continual increases in interest rates. This example demonstrates an almost 50% reduction in interest which may seem out of reach in today’s market, but the takeaway points (and room for tax improvements!) remain valid.
Here are the numbers on this married couple’s £4m portfolio as of 2015:
Section 24 was introduced in April 2017 and will phase in over the next 4 years. What it means is that you will no longer be able to claim mortgage interest, or any other property finance, as tax deductible. As the portfolio is shared equally by two people, they are due to pay tax of £56,000 each and would be considered higher rate taxpayers.
Since 2015, these landlords have taken advantage of exceptionally low rates and have refinanced their portfolio at 2.25% which almost halves their annual interest payments from £80,000 to £45,000. With loyal tenants, rent and expenses remain unchanged.
However, because of Section 24, they are unable to deduct the £45,000 mortgage finance as a tax-deductible expense. They are therefore actually taxed £192,000, an increase of £80,000 since 2015. You can see this in the table below:
TAX CREDIT
This means that the extra £80,000 ‘profit’ will be taxed at 40% - an extra £32,000. However, these landlords also get a 20% tax credit on their £45,000 mortgage interest. Therefore, there’s a tax credit of £9,000, which means that their final tax bill has increased by £23,000 thanks to Section 24. We need to remember that they have an extra £35,000 of ‘real profit’ in the bank to cover the increase in tax, so their after-tax income is actually up £12,000, or £6,000 each. You can see then that refinancing (in this case at least) paid off the tax changes and more, and just how important it is to keep your expenses down.
The couple could of course be paying less tax, and any landlord paying more than 20% tax on their property profit – whether it’s mortgaged or not – is probably paying more tax than necessary. The married couple in this example could save a further £19,620 a year.
BUT WHAT ABOUT RISING RATES?
As interest rates continue to rise, some landlords will look to pay down debt, and perhaps reduce the size of their property portfolio (where good tax planning can help eliminate capital gains tax). Meanwhile, other landlords will continue to buy, as long as the numbers still make sense.
Whatever your preferred approach, we’ve added a new interactive calculator to our video vault, to show how your pre-tax income will be impacted as your interest rates rise.
To access this and plenty of other resources, click here to register for free!
Or – if you think you could be paying less tax – take our initial assessment or call 0203 735 2940 and find out. It’s free, and could save you thousands of pounds to reinvest in your property business
