Find out more about the latest tax updates and rules for the Section 24 of the finance Act 2015 for landlords. Our team of experts at the Property Tax Hub explains the new rules for landlords and how to prepare yourself to reduce your tax liability.
How Does Section 24 affect Tax Relief on mortgage interest for UK Landlords?
Section 24 restricts how individual landlords claim tax relief on mortgage interest and other finance costs by replacing the old system of deducting these costs from rental income with a flat 20% tax credit. Basic rate taxpayers may still effectively get full relief, but higher and additional rate taxpayers now pay significantly more tax on the same rental profits, and many landlords are being dragged into higher tax bands because their taxable property profit is calculated before finance costs are taken into account.
Can landlords still claim mortgage interest tax relief?
Yes, but not as they could have done previously, instead of deducting mortgage interest from rental income landlords now receive a basic rate (20%) tax credit based on their finance costs. This is far less valuable for higher rate and additional rate taxpayers than they were in the pre-section 24 rules.
Who is most affected by section 24?
Landlords who are higher or additional rate taxpayers, or those whose gross rental profit pushes their total income into a higher band are most affected. This is because they can no longer claim relief at 40% or 45% on their financial costs.
Does Section 24 apply to limited companies?
No, section 24 only applies to individuals, partnerships of individuals, and certain trusts. Limited companies can still deduct mortgage interest as a normal business expense when calculating rental profits for corporation tax. This is one of the main reasons why landlords are currently considering or moving to a limited company arrangement for managing their rental properties.
What options do landlords have to reduce the extra costs of Section 24?
Landlords can review whether doing nothing is viable, consider restructuring ownership between spouses, explore using a limited company or LLP, or sell and reinvest, but they should always weigh the tax savings against refinancing, capital gains tax and stamp duty land tax costs.
Key Points: What is the impact of Section 24 on mortgage interest for landlords?
- Section 24 restricts tax relief on mortgage interest for individual landlords to a 20% tax credit.
- Basic rate taxpayers may be largely unaffected, but only if their total income including gross rental profit stays below the higher rate threshold.
- Higher and additional rate taxpayers pay more tax because they no longer receive relief at 40% or 45% on finance costs.
- Taxable rental profit is calculated before finance costs, which can push landlords into a higher tax band.
- Possible responses include doing nothing, transferring ownership between spouses, or using a company or LLP, but each option has refinancing, capital gains tax and stamp duty land tax implications.
- Section 24 does not apply to limited companies, which can still deduct finance costs in full for corporation tax.
What was the background to Section 24 and rental income for landlords?
On 8 July 2015, the then Chancellor George Osborne announced a significant change to how individual landlords in the UK could claim tax relief on mortgage interest and other finance costs such as bank charges and arrangement fees. This change, contained in section 24 of the Finance (No. 2) Act 2015, phased in a restriction so that, for individuals, relief on those finance costs is now effectively limited to the basic rate of income tax. The policy has reshaped the buy to let landscape and has been particularly painful for highly leveraged landlords and those in the higher and additional tax bands.
Under the pre section 24 regime, landlords could deduct their mortgage interest in full when calculating their rental profits. In other words, finance costs were treated as a normal business expense. Since section 24, that deduction is no longer allowed for most residential property finance costs for individual landlords. Instead, landlords first calculate their taxable rental profit ignoring finance costs, pay tax on that higher figure, and then get a basic rate tax credit worth up to 20% of the disallowed finance costs.
Can you still claim mortgage interest as a landlord?
Landlords often ask whether they can still claim mortgage interest at all. The answer is that you still receive some relief but the mechanism is very different from what many long term landlords were used to. The rules work differently depending on your income tax band.
- Basic rate taxpayers still get the equivalent of full relief, but only as long as their total income, calculated using the section 24 method, does not push them into the higher rate band.
- Higher rate taxpayers receive relief on finance costs at 20% instead of 40%, so they pay more tax on the same level of profit.
- Additional rate taxpayers similarly get only 20% relief instead of 45%, so the restriction hits them hardest in percentage terms.
This difference between the old and new systems is not always obvious until you run the numbers. The key is that the tax calculation now separates the rental profit figure, which ignores finance costs, from the tax credit for those costs, which is capped at 20%.
How does Section 24 work in practice?
To understand the impact of section 24, it helps to walk through a simple numerical example. Assume a landlord with the following figures for the tax year from a single property:
- £15,000 rental income
- £5,000 mortgage interest and other finance costs
- £2,000 other allowable expenses (repairs, insurance, letting fees and so on)
Ignoring section 24, the traditional way to calculate profit would have been to deduct both the £5,000 of finance costs and the £2,000 of other expenses from the £15,000 of rent, leaving £8,000 of taxable profit. Under section 24, the calculation is split into two stages.
Step 1: work out the taxable rental profit
Under section 24, the £5,000 of mortgage interest is not deducted when calculating taxable profit. Instead, the landlord deducts only the £2,000 of other expenses from rental income. That leaves a taxable profit of:
£15,000 rental income – £2,000 other expenses = £13,000 taxable rental profit.
This £13,000 is then added to the landlord’s other income, such as salary, pensions or self employment income, and is taxed at their marginal rate of income tax.
Step 2: apply the finance cost tax credit
The landlord then calculates a tax credit equal to 20% of the £5,000 finance costs. That gives a tax reduction of £1,000 which is offset against the income tax bill for the year, subject to certain limits based on the level of rental profit and total income.
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What is the impact of Section 24 on basic rate taxpayers?
For a basic rate taxpayer whose total income, including the £13,000 rental profit, still falls within the basic rate band, the calculation looks like this:
- Income tax on £13,000 at 20% = £2,600
- Less finance cost credit of £1,000 (20% of £5,000) = £1,600 tax to pay
£1,600 is exactly 20% of the original £8,000 net profit, so for this landlord, section 24 does not change the overall tax bill, at least while they remain a basic rate taxpayer. This is why you will often hear it said that basic rate taxpayers are unaffected.
What is the impact of Section 24 on higher rate taxpayers?
Now consider a landlord who is a higher rate taxpayer, so the £13,000 rental profit is taxed at 40%:
- Income tax on £13,000 at 40% = £5,200
- Less finance cost credit of £1,000 = £4,200 tax to pay
£4,200 tax on an £8,000 net profit equates to an effective tax rate of 52.5%. In other words, this landlord pays £1,000 more in tax than they would have done under the old system, where they could have deducted mortgage interest in full and been taxed on £8,000 at 40%.
What is the impact of Section 24 on additional rate taxpayers?
For an additional rate taxpayer taxed at 45% on the £13,000 rental profit, the picture is even more stark:
- Income tax on £13,000 at 45% = £5,850
- Less finance cost credit of £1,000 = £4,850 tax to pay
£4,850 tax on an £8,000 net profit is an effective rate of 60.625%. Compared with the old system, the additional rate landlord pays £1,250 more tax on the same underlying profit.
Why may basic rate landlords still be affected by Section 24?
Although the basic rate example above shows no immediate difference, it would be a mistake to assume that all basic rate landlords are safe from section 24. The critical detail is that taxable profit is now calculated without deducting mortgage interest. That means your reported rental profit is higher for income tax purposes, and it is that higher figure which determines which tax band you fall into.
Using the earlier example, the landlord’s property “profit” used to be £8,000. Under section 24, the profit for income tax band purposes is £13,000. If the landlord already had income from employment or self employment that was near the higher rate threshold, the additional £5,000 of deemed profit could tip them into the 40% band. Once that happens, a portion of their rental profit will be taxed at 40% even though they only get a 20% tax credit for the finance costs, so the overall tax burden rises.
This bracket creep effect means that some landlords who previously paid only basic rate tax have found themselves unexpectedly in higher rate territory in recent tax years, even if their underlying property cash flow has not changed.
What can landlords do about section 24?
There is no one size fits all response to section 24. Before making any structural changes, it is sensible to quantify the impact on your current and projected tax bills. In some cases, particularly where borrowing levels are modest and rental profits are not large, the extra tax may be small enough that doing nothing is the most sensible and cost effective course of action.
Option 1: accept the changes and do nothing
If the section 24 restriction increases your tax bill only slightly, the cost, complexity and risk of restructuring may easily outweigh the benefit. Restructuring can involve legal fees, refinancing charges, potential capital gains tax and stamp duty land tax. For many landlords, especially those with low gearing or who are comfortably within the basic rate band, standing still and monitoring the position each year is a perfectly rational strategy.
Option 2: sell and reinvest through a limited company
One response is to sell some or all properties that you hold personally and then reinvest the proceeds into a limited company that acquires new properties. Since companies are not affected by section 24, they can deduct finance costs in full when calculating profits subject to corporation tax. However, selling personally held property may trigger capital gains tax on any increase in value, and the company may pay the 3% additional property surcharge in stamp duty land tax when it buys replacement property. You also need to think about how you will extract profits from the company tax efficiently, for example through salaries or dividends.
Option 3: transfer beneficial ownership between spouses or civil partners
If you are married or in a civil partnership and one of you is in a lower tax band than the other, you might consider adjusting the beneficial ownership of the property so that more of the rental income is taxed on the lower rate partner. This could be achieved by changing the shares in which a property is held and, where appropriate, filing a Form 17 declaration with HMRC. The advantage is that you remain outside the corporate world and its additional administrative burdens, but you still potentially reduce the impact of section 24 by ensuring as much income as possible is taxed at 20% rather than 40% or 45%.
Option 4: move properties into a limited company or LLP
Another commonly discussed strategy is to transfer existing personally held properties into a limited company or, in some cases, a limited liability partnership (LLP) structure. The idea is that once the property is within a company, section 24 no longer applies and the company can deduct finance costs in full. However, this approach is technically complex and can carry significant tax and commercial costs. You should not attempt it without detailed professional advice.
Potential finance cost and lender considerations when restructuring property portfolios
If you are thinking of transferring property to a company, the first practical question is how the existing mortgages will be dealt with. Transferring ownership will usually require refinancing, with possible arrangement fees, valuation fees, legal costs, early repayment charges and potentially higher interest rates on company buy to let products. You need to factor these costs into your analysis when comparing the long term benefit of corporate ownership against the up front cost of change.
Some advisers talk about using a declaration of trust to transfer the beneficial interest in a property to a company while leaving the legal title, and therefore the mortgage, in your own name. This is a controversial area. If you have entered into mortgage terms and conditions with a lender, any variation that affects their security or the underlying ownership should be agreed with the lender. You should not rely solely on the assurances of an adviser who tells you that the lender does not need to be informed.
If you are considering any kind of beneficial ownership transfer or company structure, a prudent step is to ask your adviser to seek written confirmation from the lender that they are content with the proposed arrangements. Ultimately, your name is on the mortgage offer and you are the one who would face the consequences if the lender concludes that the terms have been breached.
What are the Capital Gains Tax (CGT) implications of moving property?
Any transfer of property from you personally to a company, even if you own that company 100%, is treated for capital gains tax purposes as if you had sold the property at market value. This means you may realise a chargeable gain based on the difference between the market value at the date of transfer and your original acquisition cost (plus allowable costs such as legal fees and certain improvements).
In some limited cases, where a property portfolio constitutes a genuine business with sufficient levels of activity, there may be reliefs available to defer the gain when incorporating a property rental business. However, the conditions are strict and HMRC takes a close interest in such claims. You should obtain specific advice before assuming any form of incorporation relief will apply to your circumstances.
How much is Stamp Duty Land Tax (SDLT) on transfers to a company?
When a property is transferred from an individual to a company, stamp duty land tax (SDLT) is normally payable by the company based on the market value of the property, not simply the amount of any mortgage outstanding. In addition, because the company is acquiring an additional residential property, the 3% SDLT surcharge for additional dwellings may apply, adding further cost.
If there is existing borrowing that the company takes over or assumes responsibility for, this is usually treated as consideration for SDLT purposes as well. The result is that SDLT can be a significant barrier to moving an entire personally held portfolio into a company in one go. In some circumstances involving partnerships there are partial reliefs, but again the rules are technical and professional guidance is essential.
Summary: What can landlords do to minimise the cost of Section 24?
Section 24 has fundamentally changed how individual landlords are taxed on their residential property finance costs. Although basic rate landlords may appear to be protected, the way taxable profit is now calculated can still push some into higher rate tax, especially those with significant borrowing and other sources of income. For higher and additional rate taxpayers, the loss of full relief on mortgage interest has directly increased effective tax rates on rental profits.
Before you take action, take the time to model your current and future tax position, considering interest rate movements, anticipated rental changes and your broader income. Then weigh the benefit of any restructuring against the real world costs of refinancing, capital gains tax and SDLT, as well as the ongoing compliance obligations of running a company or LLP. Calm, informed decisions will usually beat rushed reactions, particularly in an area as complex and long term as property taxation.
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