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Equip yourself with all the knowledge you will need to be a fully compliant and law-abiding landlord. Just fill in your details and we'll send a compliance checklist right to your inbox for FREE!

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November 25, 2022

Section 24: A Landlord Guide to Mortgage Interest Relief

November 14, 2022
Written by
Heather-Jade Stanley

Here, we look at how Section 24 - the amount of tax relief that landlords receive - functions, how it affects rental income, and what options landlords have.

a female landlord holds house keys

Table of contents

Section 24: A Landlord Guide to Mortgage Interest Relief

A modification to the tax code known as Section 24 that impacts the amount of tax relief that landlords receive was revealed to the public in 2015. The change was implemented gradually, but it became effective in its entirety in April 2020. Here we examine the operation of Section 24, how it impacts rental revenue, and what remedies are available.

section 24 tax change on top of coins

Simply put, Section 24 eliminates a landlord's ability to deduct mortgage interest and other financing expenses (including mortgage arrangement fees) from rental income before determining their tax liability. Landlords will only be able to claim a 20% tax credit based on their loan and mortgage interest beginning with the 2020–2021 tax year.

What is Section 24? Tax relief changes explained

Income from residential rental properties is covered by Section 24 of the UK tax code. Due to the legislation, landlords are no longer able to get as much tax relief as they once could.

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.

section 24 legislation changes being signed

The Function of Section 24

Landlords are no longer permitted to offset finance charges against their gross profit when determining their tax due under Section 24 regulations. They thus pay more in taxes. The loss of this tax relief could therefore cause a landlord who is on the verge of a higher tax bracket to move into the next tax band.

 

Increases in gross income may also have an effect on student loan repayments, child tax credits, and child benefits.

Who is affected by the changes?

Section 24 applies to all landlords who incur loan charges. This covers so-called accidental landlords as well as landlords who manage a rental property business on their own, through a partnership, or through a real estate trust. Landlords who don't live in the UK but own homes there are also impacted.

Section 24 does not apply to landlords who conduct their real estate rental business through a corporation based in the UK or elsewhere. Additionally excluded from Section 24's purview are landlords with furnished vacation rentals. At least for the moment.

Section 24 applies to all landlords who incur loan charges. This covers so-called accidental landlords as well as landlords who manage a rental property business on their own, through a partnership, or through a real estate trust. Landlords who don't live in the UK but own homes there are also impacted.

The changes apply to residential landlords if they are:

  • a UK resident who lets properties in the UK or overseas
  • an individual who lets residential properties in a partnership
  • a trustee or beneficiary of a trust liable for UK income tax on a residential rental property
  • an non-UK resident who lets residential property in the UK

Why was Section 24 introduced by the government?

The introduction of Section 24, along with other measures, is intended to restrain the expansion of the private rental market. George Osborne, the then chancellor, proposed Section 24 in 2015 out of concern about the emergence of a ‘real estate bubble’. The overall economy would have suffered big time if this bubble had burst. Some of the less-qualified landlords would leave the industry and the market would slow down if it became more difficult for landlords to make money on buy-to-let properties. Tenant stability would increase as a result, and first-time homebuyers would find it simpler to get started in the real estate market. Additionally, it would reduce the profitability of property flipping, opening up more homes for purchase.

Naturally, experts had a different opinion. They forewarned that many landlords would suffer losses as a result of raising rents to compensate for the impending decline in rental yields. The landlords who were ready to keep renting out properties would be forced to experiment with new business models, such as turning bigger family houses into HMOs and flats to increase rental income.

man in a suit holding a model house

What can I do to lessen Section 24's effect on my portfolio and manage the changes?

Many people's automatic reaction has been to advocate raising the rent. This could be ineffective for a number of reasons:

The market determines the value of your property, and if you overprice yourself, it will take much longer to find tenants, resulting in expensive void periods. In order to convince potential renters that the higher price is justified, it may be necessary to make expensive improvements to the property, which would lower its value and push you into a higher tax bracket.

All landlords are subject to the changes to Section 24 tax relief, however there are measures to lessen the impact, such as:

  • Review operating expenses: The quickest and easiest option to recover money lost due to rising taxes is to reduce property operating expenses. Instead of hiring a management company, you may manage the property yourself, for example.
  • Remortgaging can reduce the impact of Section 24 by looking at your entire mortgage expenses and locating a more affordable loan.
  • Switch your interests to commercial property to avoid Section 24's restrictions because that section only applies to residential real estate.

section 24 rent increase suggestion

  • If you have a partner or family member with a lower income, you can balance out your tax liability by dividing profits or transferring ownership to them.
  • Become a limited company; by doing so, you can escape the tax reform because Section 24 does not apply to limited firms. You should consider the costs associated before doing this because limited firms are subject to both capital gains tax and corporation tax.

Oasis Living: sit bank & leave the property management to us

In true style, we’ve left the best until last – Oasis Living! The online agency makes the experience of property maintenance hassle-free for both landlords and tenants. An oasis, if you will. The team of prop-tech entrepreneurs behind the software have formulated an easy-to-use automated system, as well as inclusive packages that are cheaper than the high-street and majority of other online letting agencies.

With a 24-hour phone line, flexible payment options, trusted handyman directory, and much more, Oasis Living makes it easier for tenants and landlords to handle issues easily Using our full scale networking platform makes maintaining a property become as simple as ordering your favourite Deliveroo.

We hope you’ve enjoyed our rundown of the property maintenance companies in London! If you have any questions, feel free to contact the team and we’d be happy to help.

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