Section 24 simplified: navigating tax changes for landlords in 2024
Landlords, ‘section 24’ may redefine your tax calculations. With the capping of mortgage interest relief at the basic tax rate, you could face a higher tax liability. This article offers a look at section 24, detailing its implementation, impact on property investment, and actionable strategies to navigate the new tax landscape with confidence.
Overview:
Understanding Section 24: The basics
Introduced in 2015 and fully implemented in 2020, Section 24 has redefined the rules of the game for landlords.
While it might seem a mere number, it’s a seismic shift that has swept across the rental landscape. Now, landlords can only claim a basic rate of 20% on mortgage interest, leading to an increase in taxable income.
Section 24 profoundly affects landlords, as the legislation reduced tax relief for them, potentially increasing tax liability.
Mortgage interest restrictions under Section 24
Before Section 24, landlords enjoyed the ability to deduct all finance costs, including mortgage interest, from their rental income, reducing their tax bills. But this has now changed.
Landlords are no longer able to deduct mortgage interest and other finance costs from their rental income, resulting in a higher taxable income for many.
Rental income and finance costs in Section 24
The repercussions of Section 24 extend to rental income and finance costs. Here are some key points to note:
- All rental income is now subject to tax.
- Landlords can only recoup mortgage interest costs at a maximum of the basic income tax rate, which is 20 percent.
- The inability to deduct mortgage interest and other finance costs before taxation has led to increased taxable rental income and potentially higher overall tax liabilities.
- However, any unused finance costs can be carried forward for use in future tax years if they are not fully utilised in the current year.
Rising mortgage rates and the effects of Section 24 can significantly impact the profitability of landlords, particularly those with smaller property portfolios, potentially driving profits to unsustainable levels due to increased mortgage costs.
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The rationale behind Section 24
The government frequently cites fairness as the catalyst behind Section 24, aiming to establish an equilibrium between landlords and owner-occupiers. Owner-occupiers were not able to gain tax relief on mortgage interest payments, unlike landlords who previously enjoyed mortgage interest relief.
In addition to promoting fairness, Section 24 aimed to achieve the following objectives:
- Curb the growth of the private rental sector
- Reduce tax advantages that landlords previously enjoyed
- Make it easier for first-time buyers to purchase homes by reducing demand from landlords.
Section 24’s impact on landlords and tax brackets
Section 24 has profoundly impacted landlords, taxing them on their gross rental income and affecting their capital gains tax, potentially increasing their taxable income.
The inability to deduct mortgage interest before tax is calculated may result in landlords, including those who pay the basic rate, being pushed into higher tax brackets.
In fact, those owning one or two properties, including accidental landlords, are most at risk of being moved into the higher tax bracket. Higher rate taxpayer landlords face a particularly significant increase in tax burden as they cannot deduct mortgage interest from their income prior to tax calculation, resulting in a larger tax bill.
This is especially true for those who have to pay stamp duty on their property purchases and pay tax accordingly.
Coping strategies for landlords
Despite the stringent changes, strategies exist to navigate Section 24.
By incorporating their property portfolio into a limited company, landlords can pay corporation tax instead of income tax, a strategy some landlords have found effective in response to Section 24.
Additionally, landlords can alleviate the tax burden by transferring property ownership to a spouse or partner in a lower tax bracket or through a limited liability partnership (LLP) with a corporate member to maintain basic rate taxpayer status.
Limited company advantages
Incorporation provides numerous benefits for landlords. Since Section 24 only impacts income tax, landlords owning properties through a limited company are not subject to this regulation.
Landlords who incorporate can enjoy a lower corporation tax rate and the ability to offset 100% of mortgage interest against profits, advantages not available to unincorporated landlords under Section 24.
Selling rental properties
Another coping strategy for landlords is selling rental properties. Many have expressed concerns and altered their investment plans due to the increased tax burden introduced by Section 24.
In fact, 47% of landlords have adjusted their investment strategies because of the changes enacted by Section 24, with some planning to sell their properties or having already done so. This trend is reflected in the noticeable 13% increase in the number of landlords selling their properties between July and October 2022.
The contraction of the rental property market, especially in high-demand areas, is at least partially a result of Section 24, as landlords find their properties less profitable.
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How tenants and the housing market are affected
The effects of Section 24 extend beyond landlords. As landlords sell their properties in response to Section 24, there’s a reduced supply of private rental properties, resulting in limited housing choices for tenants.
With a decline in rental property availability, tenants face higher competition for the remaining units, leading to soaring rents and further financial strain. This pressure is particularly noticeable in high-demand areas like London, where the decrease in rental property availability has significantly limited housing options for tenants.
How tenants and the housing market are affected
The effects of Section 24 extend beyond landlords. As landlords sell their properties in response to Section 24, there’s a reduced supply of private rental properties, resulting in limited housing choices for tenants.
With a decline in rental property availability, tenants face higher competition for the remaining units, leading to soaring rents and further financial strain. This pressure is particularly noticeable in high-demand areas like London, where the decrease in rental property availability has significantly limited housing options for tenants.
Professional advice and tax planning
The complexities of Section 24 can be a challenge to navigate.
This is where professional accountants prove invaluable, aiding landlords in preparing for the full implementation of Section 24, particularly when it comes to the 20% tax credit and the loss of mortgage interest deductions.
Tax experts can advise on legitimate strategies to remain in a lower tax bracket, like increasing pension contributions or charitable donations, to offset the potential tax increases from Section 24.
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Summary
To sum up, Section 24 is a game-changer for landlords in the UK. It has transformed the landscape of the rental market, altering tax relief on buy-to-let mortgages, and potentially pushing landlords into higher tax brackets.
Despite the challenges, landlords can still navigate the changes through strategic moves like incorporation or property sales. However, the effects on tenants and the housing market are considerable, with reduced supply and increased rental costs.
It’s crucial for landlords to seek professional advice and conduct strategic tax planning to mitigate the impacts of Section 24.
FAQs
Section 24, also known as the ‘tenant tax’, restricts landlords to claim tax relief on mortgage interest and other financing costs at the basic rate of tax. This affects how landlords can claim tax relief.
Section 24 has increased landlords’ taxable income, potentially pushing them into higher tax brackets, leading to the selling of rental properties and a shift towards incorporation. These changes have had a significant impact on landlords’ financial situations.
To cope with Section 24, landlords can consider incorporating their property portfolio into a limited company, selling rental properties, or transferring property ownership to a spouse or partner in a lower tax bracket. These strategies can help mitigate the impact of Section 24 on their rental income.
