Being a landlord in the UK comes with various rights, responsibilities and legal obligations. If you are one of the 2.74 million landlords that declared income for property rentals between 2020-2021, it is important to be aware of how legislation changes can affect your income and how you are taxed.
One such significant change in legislation that has impacted landlords since its introduction is Section 24 of the Finance Act 2015. Also known as the “Tenant Tax”, this section has brought significant changes to how landlords can claim tax relief on their mortgage interest and other finance-related costs.
In this article, we will delve into the details of Section 24, answering key questions to help landlords understand its implications and how it affects their property investments.
What Is Section 24?
Section 24, enacted in April 2017, is a clause that introduced fundamental changes to the way landlords are taxed on their rental income. Before its implementation, landlords could deduct their mortgage interest and other allowable finance costs from their rental income when calculating their taxable profit. However, with Section 24, landlords can no longer claim these finance costs as deductible expenses.
How Does Section 24 Affect Landlords’ Tax Relief?
Under Section 24, landlords’ ability to offset their mortgage interest against rental income is gradually being phased out. The changes were implemented over several years and are fully in effect as of the 2020/2021 tax year.
Now, landlords can only claim a basic rate tax deduction of 20% on their mortgage interest and finance costs, regardless of their actual tax bracket. This can lead to significantly higher tax liabilities for many landlords, especially those with substantial mortgage interest payments.
Why Was Section 24 Introduced?
Section 24 was introduced by the UK government as part of its efforts to address perceived imbalances in the property market. The primary aim was to cool down the buy-to-let sector, which was seen as contributing to rising property prices and making it difficult for first-time buyers to enter the market.
By restricting tax relief on mortgage interest and finance costs for individual landlords, the government sought to level the playing field between owner-occupiers and property investors and create a more sustainable housing market in the long term.
Which Landlords Are Affected by Section 24?
Section 24 primarily affects individual landlords and landlords who own properties in their personal names. It does not apply to landlords who operate through limited companies. Therefore, landlords with properties held under a limited company structure can still deduct their mortgage interest and finance costs from their rental income as before.
Can Landlords Still Claim Tax Relief on Other Expenses?
Yes, landlords can still claim tax relief on other allowable expenses related to their rental property. These expenses may include property maintenance and repairs, letting agent fees, insurance, property management fees and council tax.
It’s essential for landlords to keep detailed records of these expenses and seek advice from a tax professional to ensure they are claiming all eligible deductions.
How Can Landlords Mitigate the Impact of Section 24?
Section 24 can significantly affect landlords’ profitability, especially those with high mortgage interest payments. However, there are several strategies that landlords can employ to mitigate its impact:
Incorporating as a Limited Company
Some landlords have chosen to transfer their properties into a limited company to take advantage of more favourable tax treatment. Limited companies are still able to deduct mortgage interest and finance costs from rental income, making it an attractive option for some landlords.
Landlords may consider increasing the rent to compensate for the reduced tax relief and higher tax liabilities resulting from Section 24. However, this approach must be balanced with market conditions and tenant affordability.
Paying Down Mortgages
By reducing mortgage debt, landlords can decrease the interest payments and the subsequent impact of Section 24 on their tax liability.
Remortgaging allows landlords to explore lower interest rates or release equity, offering potential solutions to mitigate the impact of Section 24 by reducing mortgage costs or providing additional funds for property investment. However, landlords should carefully assess associated fees and long-term implications before opting for remortgaging.
What Has Been The Wider Impact Of Section 24 On The UK Housing Market?
The reduction in tax relief on mortgage interest has led to increased financial pressure on individual landlords, particularly those with substantial mortgage debt. This has resulted in some landlords considering exiting the buy-to-let market altogether. As a result, there may be a decrease in the overall supply of rental properties in certain areas, potentially leading to increased rental prices and decreased affordability for tenants.
The changes may also have implications for first-time buyers. As some landlords exit the market or reduce their portfolios, it could open up opportunities for potential homeowners. However, the possible increase in rental prices due to reduced supply may also make it more challenging for tenants to save for a deposit, further affecting their ability to enter the property market.
Section 24 has brought significant changes to the UK’s buy-to-let market, affecting individual landlords’ ability to claim tax relief on mortgage interest and finance costs. While it has posed challenges for many landlords, understanding its implications and exploring alternative strategies can help mitigate its impact on property investments. Seeking advice from a tax professional and staying informed about current tax laws are crucial steps for landlords to navigate the changing landscape of the rental property market in the UK.