Understanding the Changes to Section 24: What It Means for Landlords

As a landlord, keeping up with changes to tax regulations is essential for managing your property business effectively. One of the most significant shifts in recent years is the introduction of Section 24 of the Finance (No. 2) Act 2015, which brought in new rules around tax relief for mortgage interest. These changes have impacted how rental profits are calculated and taxed, leading many landlords to reassess their finances.

What is Section 24?

Section 24 refers to changes in how landlords can claim tax relief on finance costs, including mortgage interest, for their rental properties. Before Section 24 came into effect, landlords could deduct 100% of their mortgage interest and other finance costs from rental income before calculating their tax liability. This effectively reduced the taxable profits, making it more financially viable for many landlords to operate in the buy-to-let market.

However, under Section 24, landlords are no longer allowed to deduct all their finance costs from rental income. Instead, they now receive a 20% tax credit on their mortgage interest payments, regardless of their tax bracket.

Key Changes Under Section 24

The changes were phased in between 2017 and 2020. Here’s a breakdown of how the implementation took place:

2017/18
: 75% of finance costs deductible, with a 20% tax credit on the remaining 25%
2018/19: 50% of finance costs deductible, with a 20% tax credit on the remaining 50%
2019/20: 25% of finance costs deductible, with a 20% tax credit on the remaining 75%
2020/21 onwards: 0% finance costs deductible; only a 20% tax credit on the total mortgage interest.

What Does This Mean for Landlords?

For landlords in lower tax brackets, the changes may have a limited impact. However, for higher-rate taxpayers, the consequences can be significant. Let’s break it down:

Higher Tax Bills: Landlords who pay 40% or 45% tax are now only receiving 20% tax relief on their mortgage interest payments. This can lead to higher tax bills and reduced profitability, as the gap between their tax rate and the 20% tax credit widens.
Increased Taxable Income: Since mortgage interest can no longer be deducted, rental income may appear higher, pushing some landlords into higher tax brackets, even if their actual profits remain the same.
Reduced Cash Flow: With higher tax liabilities and the inability to fully offset mortgage interest, many landlords will see reduced cash flow, affecting their ability to reinvest in properties or cover unexpected expenses.

What Can Landlords Do?

While the changes to Section 24 are challenging, there are several strategies landlords can consider to reduce their tax exposure:

Incorporate Your Property Business: Limited companies are not subject to Section 24 and can still deduct mortgage interest fr
om rental income. However, this option comes with its own costs and complexities, including corporation tax, so it’s essential to get professional advice before making the switch.
Review Your Portfolio: If you own multiple properties, it might be time to review your portfolio and sell underperforming assets to improve profitability.
Raise Rents: While this may not always be popular with tenants, raising rents where possible could help cover the increased tax liabilities brought about by Section 24.
Consider Alternative Investments: Some landlords are choosing to diversify into commercial property, which is unaffected by Section 24, or into other investment vehicles that provide better tax efficiency.
Seek Professional Tax Advice: Given the complexity of the changes, it’s always advisable to consult with an accountant or tax advisor who specialises in property taxation. They can help you navigate the changes and develop a tax strategy tailored to your circumstances.

The introduction of Section 24 has undeniably changed the financial landscape for landlords, particularly those with buy-to-let mortgages. Higher tax bills and reduced profitability mean that landlords must be more strategic than ever about how they manage their property portfolios. Whether it’s restructuring your business, reassessing your properties, or raising rents, it’s essential to stay informed and adapt to these changes to remain successful in the rental market.

If you're unsure how Section 24 impacts your rental business or need advice on what steps to take, it's always worth consulting with a tax professional to ensure you're fully prepared for the challenges ahead.