I believe most people understand that some taxation is necessary to fund important expenditures that benefit society and facilitate commerce such as infrastructure including roads, railways etc, schools, hospitals, education, law and order. The problem is that to be elected, governments continually make promises that have to be funded either through taxation or borrowing.
I don’t wish to get into the politics of taxation, borrowing or spending but what it does do is throw up some rather complex tax law.
One recent example of this is the introduction of the restriction of mortgage interest relief known as Section 24 or the ‘Osbourne tax’. To recap Section 24 was introduced from April 2017 to restrict the offset of mortgage interest against rental income to the basic rate tax band for residential buy to let property. The introduction is gradual so deductions from property will be restricted to :
- 75% for 2017 to 2018
- 50% for 2018 to 2019
- 25% for 2019 to 2020
- 0% for 2020 to 2021 and beyond
Why was this introduced I hear you say ? Well to increase the tax take for government is an obvious answer, and to try and restrict landlords from fuelling house price inflation is another possible reason.
But is it fair ? We live in a free society so people choose alternative ways to invest for their retirement and one of those is to buy residential property and let it out. The popular route is to invest in pensions (which are largely invested in government bonds or the stock market) and why is that popular ? the investor gets tax relief of course ! When you put money into a pension plan you get tax relief at the rate you pay tax so if you are a higher rate tax payer you are saving 40% tax by putting that money into a pension, albeit up to an annual allowance of £40,000. So the government allows generous tax relief on pension investments but if the tax payer chooses to fund their retirement through property the government actually taxes you harder.
In some cases I have seen, the effect of this change has been to completely wipe out any profits that the investor was making.
So what’s my point here, well life isn’t fair, and the tax system isn’t fair either so what is important is tax planning to ensure whatever your circumstances you only pay the amount of tax that is required under the law.
If you are affected by S24 then feel free to get in contact for a chat about the solutions that are available.