The single biggest tax issue facing many landlords who own mortgaged residential rental property is the introduction of the new (as of tax year 2018) mortgage interest relief restrictions known as ‘Section 24’. This article looks at how landlords can spend money on property repairs to help to mitigate the impact of this significant worsening of the tax regime for ‘private landlords’ (meaning, landlords that own property in their own personal name or in a partnership).
Section 24 – a quick recap
The ‘Section 24’ mortgage interest restrictions means that between tax years 2018 and 2021, claiming mortgage interest as an expense will be progressively phased out and instead replaced with a ‘tax credit’ at a fixed rate of 20%, regardless of the tax rate of the individual. The impact of this in many cases can ‘convert’ a Basic Rate (20%) taxpayer into a Higher Rate taxpayer, without any change to the underlying property rental profits, which can create very high marginal tax rates .
OK, so how can spending money on repairs help from a tax & Section 24 view?
Property repairs are, of course, a legitimate business expense for a landlord and will reduce taxable profits on a £ for £ basis. So, now more than ever there is a significant tax benefit in spending money on repairs which maintain and improve the value of a rental property.
For a Basic Rate taxpayer in the example above, the tax benefit of a £10k refurb BEFORE Section 24 was £2k (20%), however with Section 24 fully in force the tax benefit of the same £10k refurb DOUBLES to £4k (40%).