What is Section 24
Section 24 refers to a provision in the Finance (No.2) Act 2015. It relates to the tax treatment of mortgage interest paid by residential landlords who own their properties in their personal name.
Nicknamed “tenant tax” or “mortgage interest relief restriction” it has been gradually phased in since 2017. It reduces the amount of mortgage interest landlords can deduct from their rental income before calculating their tax liability.
Most landlords will receive a much higher tax bill due to this which obviously is not very popular.
What Is Serviced Accommodation
Serviced accommodation refers to fully furnished properties that are available for short term rentals.
Guests can rent them nightly, weekly or monthly with no commitment and the ability to check in the very same day.
The properties are managed and maintained by agencies or the owner themselves. Its expected at the very least services including, cleaning, laundry and 24 hour guest support are provided.
Serviced accommodation can include, houses, flats, villas and any other type of property that has modern amenities and facilities.
Ideally you would have Wi fi, TV and kitchen appliances that guest can use during their stay. Short term lets are becoming increasingly popular with travellers and business people. The reason people love this kind of accommodation is its like a home away from home and gives more flexibility than a hotel.
In this blog we discuss whether Section 24 impacts landlords who run holiday lets.
Understanding Section 24
Section 24, also know as “tenant tax” is a provision of the Finance (No.2) Act 2015 that impacts the tax treatment of mortgage interest for residential landlords in the UK.
Before the Act came in, landlords could deduct the full amount of mortgage interest from their rental income when calculating their tax. However Section 24 gradually reduces that amount of mortgage interest that landlords can deduct.
The reduction began in April 2017 and by 2020 it was completely phased out. This means landlords now have to pay tax on all their rental income, not just the income less the mortgage interest.
The impact Section 24 has depends on the landlords circumstances, if they are mortgage FREE this wont impact them at all. If they have large 75% loan to value mortgage this will really impact them their tax liability will be much higher.
Who Does Section 24 Apply To
Section 24 applies to residential landlords in the UK who have mortgages and own their property in their personal name.
The ACT impacts landlords who receive rental income from their properties, as it will change the way they calculate their tax.
However there are some exceptions, it does not apply to landlords who own their properties outright with no mortgage. It also does not apply to commercial landlords or those who run furnished property lets.
Does Section 24 Apply to Serviced Accommodation?
The application of Section 24 to serviced accommodation is a topic of debate. Some argue that it applies since the property is a residential rented out by a landlord.
However others argue the income is classified differently for tax purposes, as the nature of short term rentals make them similar to holiday lets.
Holiday Lets are exempt from Section 24 charges, so if you set up your Serviced Accommodation correctly you will be exempt too.
Its important to seek professional tax advice, speak to your accountant before you proceed with a serviced accommodation property.
How Does Section 24 Impact Furnished Holiday Lets?
Section 24 does not apply to Holiday Lets because the rental income is classified differently for tax purposes.
Since your short term let is managed like a hotel or bed and breakfast, the rental income is classified as business income rather than residential rent.
Also because your short term rental offers the flexibility of a hotel, it makes it similar to a hotel which are exempt from Section 24.
Ultimately the application of Section 24 on Serviced Accommodation income will depend on interpretation from HMRC. You must seek professional tax advice to understand how Section 24 will impact your tax payments each year.
How Is Income From Serviced Accommodation Classified?
The classification of rental income on serviced accommodation for tax purposes is a topic for interpretation.
Some argue that income should be classified as residential rental income. However you are running the property like a bed and breakfast or hotel. For that reason its classified as business income, this gives you huge tax savings.
The key thing is it allows you to offset mortgage interest which you cannot do on residential rent.
Due to the level of service you provide with a serviced accommodation property, such as cleaning and 24 hour support you are classed as a business.
This allows you to claim other costs, like Wifi, cleaning, laundry, marketing etc which will reduce your tax bill further.
Section 24 Tax Loophole UK
Running your property as Serviced Accommodation is one of the only loopholes to avoid Section 24 Tax.
You will also get improved cashflow over running the property as a standard buy to let. Because you will be running your income as a business rather than just a landlord thats why you can avoid the tax.
A lot of landlords are selling their properties due to Section 24, however they could be using this loophole to get around the tax.
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