How To Manage Section 24

Nikka Sulton

How To Manage Section 24

Section 24, introduced in 2015 and fully implemented in April 2020, alters tax relief for landlords. This article delves into its workings, impact on landlord income, and strategies to mitigate its effects.

What is Section 24? Tax relief changes explained

Section 24 is an amendment in the UK’s tax law that applies to income on residential rental properties. The legislation means that landlords cannot claim as much tax relief as they could previously. 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.

How does Section 24 work?

Section 24 rules mean you’ll pay income tax on all property earnings, with 20% relief.

Here’s how it works:

Rental income: £15,000
Mortgage interest: £5,000
Tax on full rental income: £3,000 (20% for basic rate taxpayers) or £6,000 (40% for higher rate taxpayers)
20% relief on mortgage interest: £1,000
Basic rate taxpayers pay £2,000 tax; higher rate taxpayers pay £5,000.

Renting out a property involves taxing profits, which can be complex and worth considering.

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. Here are some strategies:

1. Review operating costs: Reducing property running costs can help recover lost money due to higher tax. For example, consider managing the property yourself instead of using a management company.

2. Re-mortgage: Review your mortgage costs and find a more competitive loan to minimize the impact of Section 24.

3. Move towards a commercial portfolio: Section 24 applies only to residential property, so switching investments to commercial property can bypass the ruling.

4. Divide profits or transfer ownership: If you have a lower-income partner or family member, splitting earnings or transferring properties to them can balance out your tax liability.

5. Become a limited company: Section 24 does not apply to limited companies, so incorporating your portfolio can help you avoid the tax change. Keep in mind that limited companies are subject to capital gains tax and corporation tax.

6. Set up a Beneficial Interest Company Trust: This allows you to transfer your portfolio into a company structure while maintaining personal ownership of the property. Seek professional advice as there may be implications such as corporation tax and re-mortgaging issues.

7. Increase rent: Consider raising rents to offset the higher tax burden, but be cautious not to enter the next tax band.

8. Reduce your portfolio: Streamlining your investments and selling underperforming properties can reduce your tax liability.

9. Sell your properties: Selling may be the only viable solution for some landlords, especially if properties are in stagnant markets. Consider using a Section 21 notice to clarify non-renewal of tenancy agreements after the contract ends.

What does Section 24 mean for landlords income?

The impact of Section 24 on your income depends on your tax band.

For lower-income earners, the effect is minimal. But for landlords with extensive portfolios, it can be substantial.

Before Section 24:

Deduct mortgage interest, paying tax on £10,000.
Basic rate taxpayers pay £2,000; higher rate taxpayers pay £4,000.

Basic rate taxpayers see no change as they can claim back the 20% previously deducted.

Higher rate taxpayers pay an additional £1,000 in tax. With multiple buy-to-let mortgages, this tax increase can be significant.

Remember, other costs like mortgage admin fees are no longer deductible, so you’ll pay tax on them as well.

What Can Landlords Do to Negate the Impact of Section 24?

If you’re dealing with Section 24 and its impact on your rental property mortgage, exploring alternative business approaches can mitigate its effects. Your specific circumstances will determine the best course of action, but here are some options to consider. If you need more information on Section 24 and strategies to address it, reach out to Gorilla Accounting for guidance.

1. Run a Limited Company

Many landlords opt to incorporate their business, despite potential downsides such as increased administrative tasks. Incorporation offers significant advantages, including the ability to bypass Section 24. Mortgage interest payments become business expenses, reducing overall profits. Additional perks include lower tax rates and indexation allowance.

However, transferring properties to a limited company constitutes a sale, incurring Stamp Duty and capital gains tax. This might outweigh the benefits of reduced mortgage interest relief. Personal allowances and exceptions would also disappear.

Securing loans for buy-to-lets as a limited company can be challenging and costly. Consider setup expenses and administrative responsibilities before making the switch.

2. Invest in Commercial Property

To sidestep Section 24, some landlords diversify by investing in commercial properties alongside residential ones. Unlike residential properties, commercial ones aren’t subject to the tax relief penalties imposed by the amendment.

3. Convert the Property

Rather than renting residential properties, consider altering their use. For instance, transforming a house or flat into a holiday rental or listing it on platforms like Airbnb can help you avoid the implications of Section 24. However, this approach involves some administrative work and may not suit every situation, so consulting a specialist accountant is advisable to ensure compliance with the law.