Section 24 Tax Explained: A Guide for Landlords

Are you a landlord in the UK looking to gain a better understanding of the Section 24 tax changes? We want to help with an understanding of Section 24 tax and its implications for landlords, along with providing practical examples and suggestions to help you navigate the new landscape.

We have to preface our comments by referring all landlords to their own tax advisors and accountants for formal advice. Our sole purpose here is to look at the implications for landlords on their property investment strategies. The full impacts of Section 24 are widely misunderstood and we want to demystify the issue, based on tools that enable you to understand personal outcomes and on our deep personal experience as landlords.

What is Section 24?

The treatment of tax under Section 24, or mortgage interest relief restriction which also became known as the “tenant tax” because it was only likely to lead to rises in rent for tenants, was phased in from April 2017 to reform the tax treatment of mortgage interest payments for landlords. Prior to these changes, landlords could claim tax relief on the interest paid on their mortgage, reducing their taxable rental income. However, under Section 24, this tax relief has been completely phased out and replaced with a tax credit at the basic rate on the cost of the mortgage.

What this means in reality is that landlords, incredibly unusually for any business, are taxed on their turnover, albeit with a much smaller tax credit against some of the financing costs. What it also means is that in a time of sharply rising interest rates (such as between December 2021 and 2023) every mortgage increase hits a higher rate tax-paying landlord for at least 80% of the rise, with just 20% covered by the tax credit.

It is entirely possible that this could tip some landlords into making a rental loss on their investment.

Examine the full effects of the Section 24 tax regime

To look at a landlord’s own Section 24 example POST-tax situation, use our Landlord Tax and Interest Calculator, our Ready Reckoner Section 24 tool. This enables a landlord to see the impact on their true nett income from buy-to-let. It’s no longer a question of whether the property “washes its face” in simple rental cover terms, it’s a complex situation involving what loan-to-value an investor has, what the Bank Rate is rising to (for Tracker mortgages), how much any Fixed Rate mortgage might rise by, and what other costs are coming into play.

Further Impacts on Landlords

The implementation of Section 24 tax clearly has significant implications for landlords across the UK. The other outcome is that by treating the total rent received as your income, and no longer thinking only of the profit after deducting mortgage costs, this could potentially push a landlord into higher tax brackets and increase their overall tax liability.

For example, let’s consider a scenario where a landlord’s rental income is £20,000 per year, and they have mortgage interest payments of £10,000 annually. Previously, they would only pay tax on £10,000 (rental income minus mortgage interest). However, under Section 24, they will now be taxed on the full £20,000, but receive a tax credit of £2000, which would represent a substantial increase in their tax bill for higher rate tax payers. And this is aside from the sharp increase in mortgage costs arising from interest rate rises. Take a look at our Landlord Tax and Interest Calculator for a full understanding of the impacts.

It’s often misunderstood that landlords who were previously in lower tax brackets can find themselves pushed into higher tax bands due to the inclusion of rental income. This can have a compounding effect, further exacerbating the impact of Section 24 on landlords’ finances.

Mitigation Strategies for Landlords

While the Section 24 tax changes pose challenges for landlords, there are several strategies they can employ to mitigate the effects and maintain profitability:

Restructure property ownership: some landlords have chosen to restructure their property ownership by transferring properties to a limited company. This strategy allows them to continue deducting mortgage interest payments as expenses, as the new rules affect individual landlords. This is not an easy strategy nor one that applies to all landlords: you must take formal advice before considering this tactic. Northwood Leicester can introduce landlords to specialist advisors in the area.
Selling up and leaving the buy-to-let market: Section 24 has led some landlords to reassess their investment portfolios and consider either exiting the buy-to-let market or selling parts of a portfolio to eliminate borrowing on the remainder. The reduced tax relief can significantly impact profitability, particularly for landlords with high mortgage costs and low rental yields. Selling properties may be a viable option for those seeking to minimise income tax liabilities or explore alternative investments, but bear in mind that capital gains tax considerations may arise. Again, we urge landlords to seek professional tax advice on their specific situations.
Increase rents: of course, this is the most direct impact of the Section 24 tax regime. To cope with rapidly surging mortgage costs and the impacts of the Section 24 tax changes, many landlords simply have to increase rents to cover their costs. At a time of rising cost of living this has potentially deep and uncomfortable implications for tenants too.

We strongly recommend a discussion about individual situations with any affected landlords to arrive at the right strategy. Where a landlord has multiple properties, selling one or more to pay down the mortgage may be the right strategy when the properties are collectively making relatively little nett income after mortgage costs, but which would remain profitable if mortgages were paid off on a remaining part of a portfolio.

As landlords ourselves we have direct experience of the impacts of Section 24, and of prospective remedies that could be of interest. Talk to us via the button below.

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