The Anti Landlord Tax

What is Section 24?

Section 24 was announced in 2015 by George Osborne former Chancellor of the Exchequer between 2010 to 2016. It is a punitive tax reform which restricts the full interest rate relief gained by Landlords on their buy to let mortgages. The amendment was phased-in gradually and came into full force in April 2020. 

This means landlords cannot claim 100% interest rate relief as they previously could on their buy to let mortgages.

Before Section 24 was introduced, you could deduct mortgage interest from your income tax bill. You could also deduct other costs related to rental properties, such as mortgage admin fees or loans to pay for furniture.

Now, you’ll need to pay tax on all the rental income you receive. You can then claim back mortgage interest costs but only up to 20% (the basic rate of income tax). In effect, it means landlords now pay more tax upfront. Plus, if you also receive a salary from another job, this could bump you into the next tax band which can increase the amount of tax you pay overall.

Why was Section 24 introduced?

Section 24 tax changes were introduced with several aims in mind:

• to curb the private rental market by making it less attractive to landlord
• to stop higher earners from claiming back large amounts of tax relief
• give first-time buyers a greater opportunity to get a foothold on the property ladder

How does Section 24 work?

Under Section 24 rules, you will need to pay income tax on all earnings then claim back relief, but only up to 20%.

Here’s an illustration of how Section 24 works:

Your rental income is £15,000 per annum

• your mortgage interest is £10,000 per annum
• under section 24 you will need to pay tax on the full rental income
• for basic rate taxpayers its 20% = £3,000
• for higher rate taxpayers its 40% = £6,000
• you can claim back 20% off your mortgage interest
• therefore, basic rate taxpayers will pay £2,000 in tax
• and higher rate taxpayers will pay £5,000 in tax

What does Section 24 mean for Landlords income?

The effect of Section 24 on your income will depend on which tax band you fall into. For lower income earners, the effect will be minimal. For landlords with large portfolios, the impact could be significant. 

Let’s take the same example above but compare the results before Section 24 was introduced:

• you could deduct your mortgage interest from your rental income
• therefore, basic rate taxpayers pay £2,000 in tax
• higher rate taxpayers pay £3,000 in tax

As you can see, there’s no difference to basic rate taxpayers as you can claim back the 20% you would have deducted previously. On the other hand, 20% tax credit to higher rate taxpayers is no good to them as they will need to pay an extra £2,000 in tax. If you’ve got a larger portfolio with buy-to-let mortgages, the increase in tax would be considerable. You will also need to remember other costs can no longer be deducted so you’ll also have to pay tax on any mortgage admin fees.

How can landlords off-set and manage Section 24?

Section 24 tax relief changes apply to all landlords but there are ways to mitigate the effects, for example:

• Review your overall mortgage costs to help minimise cost of section 24
• Move towards commercial portfolio as section 24 doesn’t cover commercial lets
• If you have a lower income partner or family member transfer splitting earnings or transferring ownership would help
• Become a limited company section 24 doesn’t apply to a limited company although you would need to seek professional accountant advice as it can be an expensive process
• Set up a Beneficial Interest Company Trust – this allows you to transfer your portfolio into a company structure so that you avoid tax changes whilst maintaining personal ownership. It’s recommended that you seek professional advice since there are other implications with these changes
• Increase your rent which could be a fine balancing act for some since you could get into the higher tax rate band
• Streamline your portfolio by reducing debt on your buy to let mortgage(s)
• Sell your portfolio most landlords are getting out of the market particularly if you have too much debt on your mortgage

Please note that this blog post is not intended to constitute financial advice and therefore should not be relied upon. Before making any decisions regarding how best to proceed, we would suggest you seek professional advice from a qualified tax adviser.

Click here to find out more about the value of your property, in today’s market for both sales and lettings.