If you own a rental property in the UK, you have probably heard about Section 24 and how it affects UK landlords. But what is Section 24?
It is a tax rule introduced by the UK Government that applies to income from residential rental properties in the UK. It has significantly changed the way landlords are taxed, particularly those with buy-to-let properties financed with mortgages.
This blog explains Section 24, how it works, and why landlords need to manage their tax liabilities.
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What is Section 24?
The UK government introduced legislation called Section 24 to restrict the amount of mortgage interest and finance costs that individual landlords can deduct from their rental income before calculating their tax bill.What is the Tax Rule for Section 24?
Before Section 24, landlords were able to claim mortgage interest and other finance costs, such as mortgage arrangement fees and loan interest, as tax-deductible. However, the rules changed between April 2017 and April 2020. Today, you cannot deduct mortgage interest expenses from rental income in the traditional way. Instead, you receive a basic rate reduction equal to 20% of your finance costs. This means many landlords now pay tax on a higher taxable profit than they did before Section 24. Moreover, if you receive a salary from another job, you may be pushed into a higher Income Tax band, which can increase the overall amount of tax you pay.When was Section 24 introduced, and why?
Now that we know what is Section 24, let’s discuss when and why it was introduced. Section 24 was introduced in the UK in the Summer Budget of July 2015 by Chancellor George Osborne. Gradually, the changes were phased in from 6 April 2017 and were fully implemented by 6 April 2020. The table below shows the phased introduction of Section 24:| Tax year | Implementation timeline of Section 24 |
| 2017- 2018 | You could deduct 75% of finance costs from rental income, while the remaining 25% qualified for a basic rate tax reduction (20%). |
| 2018 -2019 | You could deduct 50% of finance costs from your rental income, while the remaining 50% qualified for a basic rate tax reduction. |
| 2019-2020 | You could deduct 25% of finance costs from your rental income, while the remaining increased to 75%. |
| 2020- onwards | 100% of mortgage interest payments were fully subject to the new tax rules. |
What is the Purpose of Section 24?
The purpose of this legislation was to create what it considered a fairer tax system between landlords and homeowners. The government believed that tax relief on mortgage interest gave landlords an advantage over homeowners. So, it introduced Section 24 to reduce the tax advantages previously available to buy-to-let landlords. The policy also aimed to encourage first-time buyers to enter the housing market. The Government also intended to reduce tax advantages available to leveraged buy-to-let investors and improve access to housing for owner-occupiers. Additionally, it included a stamp duty surcharge for buyers of second properties.Will Section 24 Affect Me?
To understand what is Section 24, you need to learn who it applies to. Remember, not all landlords are affected by it. It can affect you if you are an individual landlord owning residential rental properties. It also affects partnerships consisting of individual landlords that own residential rental properties and trusts receiving rental income from residential properties. However, if you are a limited company owning buy-to-let properties or are commercial property landlords, this policy does not apply to you.How Does Section 24 Work?
Under the current rules, it is pretty easy to understand what is Section 24 and how it works. You must calculate rental income, deduct allowable expenses excluding finance costs and mortgage interest, pay income tax on the remaining profit, and claim a tax credit worth 20% of your mortgage interest and finance costs. For instance, assume that you receive a rental income of £15,000, mortgage interest is £6,000, and other allowable expenses are £2,000. Under the new rules of Section 24: £15,000 - £2,000 = £13,000 taxable rental profit You then receive a tax credit equal to 20% of the £6,000 mortgage interest, which is £1,200. Thus, higher-rate and additional-rate taxpayers often pay more tax than before.How Does Section 24 Affect Landlords In the UK?
It is also important to discuss how Section 24 affects landlords to fully understand what is Section 24. The impact of this policy can vary depending on a landlord's circumstances. Some of the common effects are:Tax Band Changes
You may be pushed into higher income tax bands when your taxable income appears higher.Higher Tax Bills
Since mortgage interest is no longer fully deductible, many landlords now pay tax on a larger amount of income.Reduced Rental Profits
If you have large mortgages, you may see significantly lower net profits.Impact on Benefits
If your taxable income increases, it could affect eligibility for certain benefits, including Personal Allowance and Child Benefit thresholds.What is the Section 24 Tax Loophole?
Section 24 is not a tax loophole. Instead, it is legislation that restricts mortgage interest tax relief for individual landlords. Some landlords reduce its impact by restructuring their property ownership, reducing borrowing, or purchasing properties through a limited company, but these are tax planning strategies rather than loopholes.What You Can Do to Reduce the Impact of Section 24?
When exploring what is Section 24, it is important to discuss its effects and strategies to reduce them. If you are wondering whether you can reduce the impact of Section 24, then the answer is yes, you can. Landlords having a mortgage on a rental property may want to explore ways to reduce the impact of Section 24 on their tax bill. In some cases, changing how you manage your property business may help to reduce this policy impact. However, the best approach will depend on your circumstances. The section below can help you understand the choices available and decide which may be suitable for you to reduce the impact of Section 24:Reduce Borrowing
One of the best options to reduce the effect of Section 24 and finance costs is paying down mortgage debt.Review Rental Pricing
Some landlords increase the rents to cover the high taxes. However, you should first consider what tenants in the local market can afford.Operate Through A Limited Company
Running a limited company can also help you reduce the impacts of Section 24 because companies can still deduct mortgage interest as a business expense. Incorporating solely for tax reasons can trigger Capital Gains Tax and Stamp Duty Land Tax.Sell Properties
You can sell properties that are no longer profitable to reduce the size of your portfolio. This can help you to cut costs to cover the extra tax to pay under Section 24. Moreover, it may allow you to use the proceeds to pay down or repay mortgages on your remaining properties. However, selling a property might trigger Capital Gains Tax (CGT), and you may have to pay a large amount of money.Transfer Property to a Spouse or Civil Partner
Another way to reduce the effects of Section 24 is transferring part or all of a buy-to-let property to a spouse or civil partner who pays tax at a lower rate. However, before making the transfer, you should consider whether the additional rental income could push your spouse or civil partner into a higher tax band. Moreover, transfers between spouses are generally free from Capital Gains Tax.What Expenses Can UK Landlords Still Claim?
Other than “what is Section 24”, landlords also ask about the expenses they can still claim. You should know that even with Section 24, you can still claim various allowable expenses, such as:- Insurance premiums
- Professional fees
- Property maintenance and repair
- Advertising costs
- Letting agent fees
- Accountancy fees
- Service charges
- Ground rent
- Council tax and utility bills (where paid by the landlord)
Does Section 24 Affect Limited Companies?
No, it does not affect limited companies because Section 24 does not apply to companies paying Corporation Tax. Section 24 only applies to individual landlords and partnerships of individuals who own residential property in their personal names. However, companies can continue deducting mortgage interest as a business expense when calculating taxable profits. This means that if a limited company owns a property, it can subtract the full mortgage interest directly from its income before paying Corporation Tax.Let’s Discuss Your Needs
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