The UK government recently introduced new laws that have in some ways shaken buy-to-let property investing to its foundations.
So what’s the bad news?
Imagine this situation:
You have an interest-only mortgage on your buy-to-let property and you’re currently getting £500 a month rent from your tenant. Your mortgage payment is £100 a month.
Up until now, you can consider that £100 as an expense. And as per standard accounting, that means your profit is £500 – £100. And you only pay tax on profits. So the tax would be paid on £400.
Section 24 means you can’t do that anymore. The mortgage interest can no longer be recognised as an expense.
So you’d pay tax on the full £500.
This is the first time in British legal history that we have been taxed on debt.
And this simple little rule change has dragged many buy-to-let landlords into the realms of unprofitability, which has caused many to sell up.
However, if you want doom and gloom you can read the mainstream newspapers. Here at MoneyBlog, wherever possible, we aim to tell you the upside as well.
Is the government trying to kill buy-to-let? Well… maybe. Conservative politics believes in the right of every individual to own their own home. Having said that, they do realise that for some people either by choice or by lifestyle, renting just makes more sense. But what they are trying to solve is the current situation in which so many millennials long since let go of the idea of owning property because they simply cannot afford it and cannot imagine ever being able to afford to buy their own place.
But, many property experts think that rather than trying to kill buy-to-let, the government is simply trying to reform it. There have, after all, been many rogue landlords in recent years.
You see, there is a little hack that makes Section 24 completely go away that didn’t make the mainstream newspapers because it wasn’t gloomy enough:
If you buy the property in a company, a legitimate business entity, Section 24 does not apply and you can still claim the interest on the mortgage as an expense.
So, is buy-to-let dead? We think not. It’s just being reformed. And if you’re prepared to form a company, and do a bit more paperwork, it can still be a worthwhile thing to do.