George Osbourne may no longer be Chancellor of the Exchequer but his legacy remains in the UK property market in the form of Clause 24 that will eventually rear its head as of April 2017.
What is Clause 24?
The Clause, known by some as “George’s Tenant Tax”, was first announced by Osbourne during his Summer Budget on 8th July 2015 and in essence means property owners and landlords will now be taxed on turnover and not profit.
This restriction of financial cost relief, potentially created to put more properties in the hands of first-time buyers rather than landlords, will be phased in over a number of years as the basic rate is shifted down to 20% by 2020.
Should I Be Worried About Clause 24?
The announcement of Clause 24 initially created some panic within the current UK buy-to-let market but in reality any changes may be subtle.
From a landlord’s perspective the two key options are to either raise rent, if the local surrounding market can withstand and absorb it, or to sell. Whilst the latter option might appear to be a quick fix, with more landlords selling, demand will continue to outstrip supply meaning opportunities to increase rent will exist and potentially grow.
If you do decide to hold, one major concern will be the maintenance of a profitable letting business. To do this you will also need to consider your new profit margin against normal contingencies such as boiler breakdowns, tenant evictions and other such issues.
With all of this in mind, depending on your operating size, there is the very real option of creating a Limited company and operating all properties under the business name thus allowing you to take advantage of UK corporation tax laws meaning your property business will be unaffected by Clause 24.
However, you should also be aware of the difficulty of obtaining a Limited company mortgage as well as the costs involved in transferring a property into the company name. This would constitute a sale and result in capital gains taxes if the sale resulted in a profit. Also, as mentioned previously, a Limited company would also pay corporation tax and be liable for income tax.
Our advice would be to avoid worrying and instead focus on action. There are multiple options out there to help curtail or nullify the impact of Clause 24.
If you have specific questions about Clause 24, or any other aspect of the property market, contact us here or come along to the next Belfast Property Meet!