Clause 24 – the property investor’s game changer
Clause 24 – This article relates exclusively to residential property investors
Clause 24 its major component, will not affect you if you are in the envious position of having zero debt on your property investments. For everyone else Mr Osbourne comes across as a vampire sucking the life blood, cash flow, out of their business. At an RSA meeting one investor referred to the Chancellor as “Boy George”. Rather than focus on creating more commerce that creates lasting jobs the chancellor has chosen to increase taxes on business. The frustrating thing is that the chancellor has taken away a legitimate business expense without any explanation or consultation. What’s more confounding is that the OECD want to limit interest tax relief throughout the Eurozone. The OECD looks to address the issue of profit shifting. But in a way that is likely to cause financial distress across a number of industry sectors. E.g. cross boarder landlords as well as energy companies. For those interested the following articles goes in depth into what the OECD are looking to do. OECD link and also PwC annalysis on OECD . What do Landlords and property investors need to look out for with clause 24? Which will be phased in during 2017 – 2020.
- Interest will now not be an allowable expense. This pretty much includes all types of borrowing interest and costs associated with raising the borrowing. Instead you will get interest relief which equates to 20% of your total interest payment.
- The 10% wear and tear allowance will be abolished potentially increasing your taxable profits.
Let’s now have a look at a worked example. We +will only consider the impact of interest. Clause 24
As you can see the lower rate tax payer is not affected. However the higher rate and additional rate taxpayers will make a net loss in this scenario. Clearly the lower the debt the less the impact. An increase in interest rates is also punitive to the private landlord. Investor who have built a portfolio by refinancing properties to acquire more and have a high Loan To Value on their portfolio will be affected. It will include people who have a job and a small portfolio. People who’s full time job is a property investor with many properties. The 10% wear and tear allowance will be abolished altogether from April 2016. In its place private landlords will be able to claim as an expenses all replacement costs relating to moveable furniture, white goods, carpets etc. If you spend less than 10% of your rental income on replacement costs you lose out. If you spend more than 10% you gain. Clearly clause 24 will affect an array of private landlords. Many landlords will probably do nothing until they are actually paying more tax to HMRC. Thats not a good way to do things. No doubt some landlords may lose their properties. Even though there is strong opposition to this tax from all the major accountancy bodies who believe the tax is “unfair and unreasonable” “unthought through” and will cause “extreme confusion” the government is unlikely to back down. Albeit it may make changes in light of “unforeseen consequences”. So what can be done to alleviate the problems caused by clause 24? Well there are a number of options that could be used all of which focus on the cash flows of your property business and look to maximise them e.g.
- For someone who has multiple properties it may be best to sell some properties and use the cash to pay off debt on the remaining portfolio.
- At the time of writing many solutions revolve around the use of Limited companies which are not affected by clause 24, i.e. you can still claim interest payments as a business expense, however the solutions are varied and complex so a one stop shop fits all is not appropriate, tailored solutions are the best way forward, all of which work best with arms length agreements. e.g.
- You could use a declaration of trust with a Limited company.
- You could set up your own letting management company.
- Any further purchases you make could be done using a limited company
Some potential issues with using a limited company:-
- Interest rates on borrowing are generally higher
- Depending on how you acquired your portfolio transferring your properties into a limited company will give rise to you paying CGT (capital gains tax) and the company paying SDLT (stamp duty land tax) both of which maybe payable within 9 months.
- Other issues of operating a limited company were outlined in an other article I wrote Dividend tax changes
The reality is your business goals and crunching the numbers on your portfolio will give you an indication of what is best for you.
This move by the government is widely considered amongst the big players in professional property investing, like Ranjan Bhattacharya, a means to bring in the large corporate landlord.
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