November 24, 2023 3:28 pm

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Nikka Sulton

In straightforward terms, Section 24 removes the option for landlords to subtract mortgage interest and related financing costs, like mortgage arrangement fees, from their rental income when calculating their tax obligation. From the tax year 2020–2021 onward, landlords can only seek a 20% tax credit based on their loan and mortgage interest.

In 2015, a tax code amendment, Section 24, was unveiled, with full implementation occurring in April 2020. This change affects tax relief for landlords. Section 24 eliminates the landlord’s capacity to deduct mortgage interest and financing expenses (including mortgage arrangement fees) from rental income before calculating tax liability. Instead, landlords can now claim a 20% tax credit on their loan and mortgage interest, starting from the 2020–2021 tax year.

In this analysis, we delve into the workings of Section 24 and its effects on rental income. Put plainly, Section 24 removes the landlord’s capability to subtract mortgage interest and other financing expenses (including mortgage arrangement fees) from their rental income when calculating tax obligations. Instead, landlords can now only claim a 20% tax credit for loan and mortgage interest, commencing in the 2020–2021 tax year.


Why was section 24 introduced?

Section 24, launched in 2015, seeks to create a fairer environment by eliminating what was seen as a benefit for high-earning landlords. Then-Chancellor George Osborne drew attention to this perceived inequality in the 2015 Summer Budget.

Osborne’s argument was simple: he noted that buy-to-let landlords had a substantial advantage in the property market because they could subtract mortgage interest payments from their income, a privilege not accessible to homebuyers. Additionally, the more affluent the landlord, the more tax relief they enjoyed. This, in his perspective, introduced an imbalance in the tax system.


Tax Relief Adjustments

The introduction of Section 24 in the UK tax code has brought significant changes to the taxation of rental income from residential properties. Previously, landlords could deduct mortgage interest and other related expenses from their rental income when calculating their tax liabilities. This included costs such as mortgage administrative fees and loans for furnishing purchases.

However, with the implementation of Section 24, landlords are now required to pay tax on their entire rental income. They can only claim back a portion of their mortgage interest costs, capped at 20%, which corresponds to the basic rate of income tax.

This alteration results in landlords facing higher initial tax payments. Additionally, for those landlords who have additional sources of income, such as a separate job with a salary, the increase in rental income may push them into a higher tax bracket, leading to an overall higher tax liability.

Essentially, Section 24 restricts landlords from offsetting financial charges against their gross profit when calculating their tax obligations. This shift translates to increased tax payments, potentially causing landlords who were on the edge of a higher tax bracket to move into the next one. Moreover, the rise in gross income can have implications for other financial aspects, including student loan repayments, child tax credits, and child benefits, all of which are influenced by changes in income levels.


Who will be affected by Section 24 and its tax relief?

These tax relief rules have broad applicability, affecting individual landlords within the private rented sector. This includes various scenarios:

  • UK-resident landlords who rent out properties in the UK or abroad.
  • Non-UK resident landlords who rent out properties in the UK.
  • Landlords who let properties through partnerships.
  • Landlords who operate as limited liability companies, subject to a different tax system, allowing them to declare rental income after accounting for mortgage costs.

The government’s policy paper on finance cost relief estimated that only a fifth of individual landlords would experience reduced relief under the new regulations. It’s noteworthy that the higher-earning landlords would bear the primary impact of these changes.

As a result of these alterations, landlords are now liable to pay tax on their gross rental income, potentially causing some to transition into a higher tax bracket.


What finance cost tax relief do landlords get in 2023?

Under the revised tax rules introduced by Section 24, landlords are eligible for a 20% tax credit based on the lower of three factors:

  1. Finance costs, which include mortgage interest, interest on loans for furnishing purchases, and fees associated with mortgages or loans.
  2. Property business profits.
  3. Adjusted total income.

This change essentially means that landlords can no longer deduct their full finance costs, including mortgage interest, from their rental income for tax purposes. Instead, they receive a 20% tax credit on the lowest value among these three elements.


How has the government responded to the petition asking for the full tax relief to be reinstated?

The impact of Section 24 on the rental property market has prompted many landlords to voice their concerns by signing a petition. The petition emphasizes the consequences of section 24 on the industry’s rental stock and the potential benefits of reinstating full relief.

Signatories of the petition, including Marc von Grundherr, Director of Benham and Reeves, highlight the significant influence of these changes. According to a survey of landlords, 73% of those considering exiting the sector would reconsider their decision if the section 24 alterations were reversed.

In response, the government has maintained its stance, asserting that it will persist in setting mortgage interest relief against rental income at the basic rate of tax. The government’s rationale behind this decision is to uphold fairness within the income tax system. It aims to avoid providing landlords with certain advantages that go beyond what is afforded to homeowners, which was the original intent of the changes.

While the petition still has a journey ahead, it could potentially lead to a parliamentary debate if it garners 100,000 signatures.


What Exactly is the Change in Interest Relief?

Prior to the tax year 2016/17, individual residential landlords were taxed based on their net rental profits. This net profit calculation involved subtracting all eligible property expenses and mortgage interest from the gross rental income.

 “So, if you have rental income of £10,000, estate agent fees & other allowable expenses of £1,000, and mortgage interest of £7,000, your net rental profits will be £2,000, and you pay tax on this. Assuming you are a higher rate taxpayer, your income tax liability will be £800 (40% of the net rental profit of £2,000).”

Due to the gradual implementation of interest rate relief restrictions starting from the tax year 2016/17 and reaching full effect in the tax year 2020/21, landlords are no longer permitted to deduct mortgage interest as an expense. Instead, they receive a tax credit at a rate of 20% against their tax liability.

In the example provided, net rental profits amount to £9,000, considering that mortgage interest is no longer deductible. Consequently, the tax liability at a rate of 40% reaches £3,600 before accounting for the credit on mortgage interest.

Landlords receive a tax credit for mortgage interest totaling £1,400, which corresponds to 20% of the £7,000 mortgage interest. Consequently, the net tax liability stands at £2,200, representing a substantial 175% increase in tax liability compared to the previous system.

Under the new system of interest relief restriction, landlords may find themselves facing a tax bill of £2,200, even though their net rental income after accounting for interest stands at only £2,000. This results in a loss of £200 after tax, and the effective tax rate on net rental profits reaches a staggering 110%.

In certain cases, this effective tax rate can soar to 220%. This marks the reality of the new world of interest relief restriction. Ironically, the government’s intention behind these changes was to create a fairer tax system.


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What can I do to lessen the effect of Section 24 on my portfolio and manage the changes on Interest Relief? 

Raising the rent might seem like a solution to offset the impact of Section 24, but it may not always be effective. Here’s why:

  1. Market Dynamics: Rental rates are influenced by the market. Overpricing your property could lead to longer vacancies, resulting in financial losses during void periods. It’s crucial to align your rent with prevailing market rates to attract tenants promptly.
  2. Property Upgrades: To justify higher rent, you might consider costly property improvements. However, this could inadvertently lower your property’s value and potentially push you into a higher tax bracket.


Given the changes in Section 24, landlords can explore alternative strategies to mitigate its impact:

  1. Review Operating Expenses: Reduce property operating costs to compensate for rising taxes. Managing the property yourself, rather than hiring a management company, can be a cost-effective option.
  2. Remortgage: Assess your entire mortgage expenses and seek a more affordable loan, which can help reduce the overall financial burden caused by Section 24.
  3. Consider Commercial Property: Section 24 primarily applies to residential real estate, so diversifying into commercial property investments may help you avoid these restrictions.

Each landlord’s situation is unique, and the effectiveness of these measures may vary. It’s advisable to consult with financial and property experts to determine the best approach for your specific circumstances.



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A Comprehensive Guide to Buy-to-Let Mortgages

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