Section 24 is the reason for rocketing rents – not landlords

Reply to the comment left by Mick Roberts at 15/11/2024 - 08:35Mick, coming late to this. Section 24 is pernicious but I think your figures are not quite right. Assume the landlord is an individual and his other income takes him into the 40% income tax band and there are no expenses.
Landlord receives £800pm rent
Tax on this is 40% x £800 = £320pm
Mortgage interest is £500pm
20% of this is deductible, i.e. £100.
Calculation is £800 - (£320-£100)
= £800 - £220 = £580.
Mortgage interest is £500 leaving £80 profit instead of £180.
If mortgage interest increased to £650 pm, the calculation is:
£320 tax less £130 (20% of £650) = £190.
£800 - £190 = £610 leaving a £40 loss.

This is not to criticise you but we need to be precise as our political enemies will pick on any mistakes to vilify us.

Reply to the comment left by Ian Narbeth at 27/11/2024 - 11:21
Yes Ian,
You & I understand this. And I have in my notes said something about a complicated 20% Tax credit back, but I do try & keep it simple for my tenants to understand so they get the outline. As it's that bonkers, they can't get their head round it.

And your figures have complicated me even more ha ha.

Yes even the enemies if they were to vilify us, there's not getting away from it, Section 24 is causing homelessness.

Reply to the comment left by Mick Roberts at 27/11/2024 - 18:31The simplest way to see it is that for a basic rate taxpayer, there is no effect. But for a higher rate taxpayer, the effect is to inflate the already high cost of the mortgage by 33% or one third of its nominal value. So a £300 mortgage requires £400 of rent to cover it. For additional rate taxpayers it is approximately a 45% surcharge (so £300 is covered by £436) and 100% for those in the 60% tax trap, I.e. now £600.

Reply to the comment left by Peter Merrick at 27/11/2024 - 21:53
Yes another way of putting it. When it first came in, I could work it out. I now give up & the Govt has had us over with everything else too.

Reply to the comment left by Peter Merrick at 27/11/2024 - 21:53
Peter, I think a simpler way to look at it is that a taxpayer whose top rate of income tax is 40% pays extra tax of 20% of the amount of his mortgage interest. For a 45% taxpayer, it's 25%.

Reply to the comment left by Ian Narbeth at 28/11/2024 - 10:42Certainly that is a simpler way to look at it, but it is also not that helpful for financial planning as it is to do with the effects of tax vs tax relief, rather than just tax.
The correct calculations are as follows:
For any taxpayer, the net cost of £100 of mortgage is £80 after 20% tax deduction, which is to be serviced by £80 of net (post tax) income.
For a higher rate taxpayer, £100 of rent gives only £60 net income as 40% is deducted for tax, so it only covers 3/4 or 75% of the £80 required.
To get £80 net income as a higher rate taxpayer, you need to multiply this by 80/60 (= 4/3 or 133%), which is £133.33 or 1/3 more. So you need £133.33 to cover every £100 of mortgage, and the cost of the mortgage has effectively been inflated by 33%.
For an additional rate taxpayer, £100 of rent is only worth £55 net, so this needs to be multiplied by 80/55 or 145%, and so the cost is inflated by 45%.
For those in the 60% tax trap, £100 only gives you £40 after tax, so the real cost is multiplied by 80/40 to give 200%, so the cost is doubled.
This inevitably leads to higher rent to cover the inflated costs, lower margins or fewer leveraged landlords, probably all three.
In the meanwhile, those who are unleveraged reap the benefits of higher market rents because of the perverse effects of this unprecedented fiscal attack on landlords, which falls unequally and unfairly on those who used a mortgage to provide their tenant with somewhere to live.
Let be clear, this is a double taxation, because the tenant's income is taxed twice before the mortgage is paid, rather than just once when the mortgage is held in the tenant's name. It is highly likely that the government has always known this.
So it may make better business sense for some landlords to have a small number of unleveraged properties rather than a larger number of leveraged properties.
Or perhaps lenders could be persuaded to let the tenant pay the mortgage directly in lieu of some of the rent so that their mortgage payments are not taxed twice?

I wonder...will it get to the point where the dividing line is really going to be between the PRS LL's with borrowed finance and those that don't?

Reply to the comment left by Reluctant Landlord at 29/11/2024 - 09:06
That is certainly one dividing line, but another is whether a LL is incorporated or not. I would also factor in the impact of BTR.

Reply to the comment left by NewYorkie at 14/11/2024 - 15:40
'Requiring' or ' Demanding' social housing.
There are very few affordability checks once a T has 'won' a social rent house.
Perhaps they should pay market rent if they erecieve over a certain amount of money monthly etc?

Reply to the comment left by Reluctant Landlord at 29/11/2024 - 09:06
Or those on a low income whose rental income does not put them above the higher rate threshold.