The introduction of Section 24 in 2015 changed the amount of tax relief landlords could receive. After a phased introduction, the amendment came into full force in April 2020. So what is Section 24 and how does it work?
What’s Section 24 all about?
Section 24 is an amendment to the UK tax law that applies to income on residential rental properties. It was introduced to stop high earners from claiming back large amounts of tax relief and to give first-time buyers a chance to get on the property ladder.
Essentially, the change means that landlords cannot claim as much tax relief as they could previously. Whereas they used to be able to deduct mortgage interest from their income tax bill, this is no longer the case.
Also, under Section 24, other costs such as mortgage admin fees or loans to pay for furniture are no longer deductible.
So what does this actually mean? It basically means that landlords now pay more tax upfront. If you are a landlord, you can claim back mortgage interest costs, but only up to the basic rate of income tax (currently 20%).
How does it work?
Section 24 means that as a landlord, you need to pay income tax on all earnings from your rental property.
So when it comes to submitting your tax return, you won’t be able to deduct mortgage interest costs from your taxable profits.
Let’s break it down. Say you received a rental income of £12,000 and your mortgage interest was £2,000. Under Section 24, a basic rate taxpayer would pay £2,400 and a higher rate taxpayer would pay £4,800.
You can claim back 20% of your mortgage interest payments, which in this case would be £400. So if you are a basic rate taxpayer, your tax bill for your rental property would be £2,000. However, if you are a higher rate taxpayer, it would be £4,400.
What’s the impact?
The change means that basic rate taxpayers will see little difference in the tax relief available to them. It is a bigger deal for higher rate taxpayers though. If you are a landlord with several buy-to-let properties, Section 24 could mean that your tax bill increases significantly.*
In fact, research from Simple Landlords found that 47% of its customers claimed the introduction of Section 24 had forced them to change their investment strategy, and 6% planned to exit the market as a result.
*Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
Can you offset Section 24?
When it comes to tax, things can be complicated. If you are a landlord and are concerned about the impact of Section 24, then it could be a good idea to consult an accountant.
There are ways to mitigate the impact of the tax relief changes, but getting some professional advice is sometimes best. Options to offset the impact of Section 24 include becoming a limited company, moving towards a commercial portfolio or remortgaging. However, each option will depend on your individual circumstances, so it is always best to get advice.
If you are looking for a financial professional that could help, sites like Unbiased can act as a directory for your local area. Its aim is to match people with the right type of financial expert for their situation.
