Clause 24
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PROTECTING YOUR PROPERTY PORTFOLIO FROM CLAUSE 24 AND INEVITABLE FINANCIAL RUIN!!
Until recently, the Conservative Party was generally regarded as a friend of those who wanted
to make something of themselves and their families, especially those who realised building
property portfolios were an excellent way to do this.
This all changed with the poisonous new rules introduced by George Osbourne when he decided
to decimate Clause 24, or to give it it's proper name; Section 24 of the Finance Act (2) 2015, which
was a mechanism by which a private property landlords were able to offset 100% of mortgage
interest from tax (for the obvious reason it was a real cost of doing business).
Osbourne replaced this with a “tax credit” of “20% of the mortgage interest charged” which is
currently being phased in and will come into full effect during the 20/21 tax year.
In simple terms Clause 24 will result in a removal of 100% relief for mortgage interest and replace it with a 20% tax credit. As an example, we can look at a private property investor with 40 properties and a rent roll of £335,000.
This is taken from a report written by Property 118:
Current tax: £15,200. Tax in 2020/21: £54,100. Increase: 256%
Caroline is a higher rate taxpayer. In the last year she earned £65,000 from her property portfolio of 40 flats and houses. She has no other income. She has one child but receives no child benefit.
Her properties generate £333,000 in rent. Maintenance and other business costs total £113,000, and she pays £155,000 in mortgage interest.
Under the current tax rules Caroline makes a net profit of: £65,000, on which the tax is £15,200. This leaves her with £49,800. Her effective tax rate is 23.4%.
After Section 24 is fully implemented, Caroline’s net income would be deemed to be £220,000. The tax will be £54,100, leaving £10,900 a year for herself and her child to live on. Her effective tax rate would be 83% of the real profit. She will be moved into the additional rate band and lose the benefit of the personal allowance.
As you can see there is literally no fair or logical sense to these changes as they, in effect, create tax on income that does not actually exist thus creating a real life tax burden on the rest of someone’s income well in excess of something even Labour could have come up with.
Bearing in mind these new tax increases will lead to many profitable portfolios now becoming strongly loss making property owners are in real trouble.
So what can they do?
Sell it all! Some investors have started to do this. Some people argue that promoting this behaviour was the government's intention in the first place to supplement the number of properties coming onto the market due to their failure to deliver enough new build properties.
Incorporation - the received wisdom in property circles is that incorporation (transferring properties to a Limited Company) is the best option. The reason being that if a property is owned by a Company then the full extent of the mortgage interest can be offset against Corporation Tax.
BUT there are very real problems with incorporation:
It takes time. If a tax advisor knows what they are doing they will move a portfolio to a partnership or LLP and then to a Limited Company. This has to be straddled over 2 tax year start/ends so can potentially take 3 years. If it's done incorrectly or by missing out some steps then CGT and SDLT may be due.
There is no asset protection. Once the process is completed there will be some protection because the business is carried on by a Limited Company BUT a good litigator will make short work of that to seize company assets still if they want.
There is no opportunity for estate planning. What people do not take into account is that shares in a company whose main activity is the rental of property DO NOT qualify for Business Relief from Inheritance Tax.
So what can they do?
Using an Umbrella Asset Trust the property investor will achieve the following:
The portfolio is protected from third party threat (HMRC, bankruptcy etc)
They no longer “own” the properties (the Trust Fund they set up does) so Clause 24 (the onerous new tax) is no longer relevant or payable
They can pass control of the properties in an orderly, predictable and efficient way
The process takes 1-2 months; they do not need to wait 3 years.
The same processes for rent collection can be maintained and there is no longer the threat of a positively profitable portfolio suddenly becoming unprofitable!
If you would like to find out more about Umbrella Asset Trusts simply click on the link below and complete the quick enquiry form or email us at enquiries@princewealth.co.uk and we will be in touch.