What Is Section 24?
Section 24 is a regulation in the UK that affects how landlords can claim mortgage interest relief on rental properties. This change has been implemented gradually, and impacts the tax-deductible amount of mortgage interest landlords can claim.
Key Highlights of Section 24:
Phased Reduction of Mortgage Interest Relief: Under Section 24, the tax-deductible amount of mortgage interest that landlords can claim was gradually reduced from 2017 to 2021. This reduction ultimately impacts the taxable income from rental properties.
Transition to Basic Rate Tax Relief: As a result of Section 24, landlords now receive a tax credit at the basic 20% rate on the lower amount from:
- The finance costs – mortgage interest, interest on loans and fees incurred when taking out or repaying mortgages or loans
- The profits of the property business
- Adjusted total income
Who Does Section 24 Affect: Individual landlords who are operating in the private rental market. Landlords that operate under a limited company are subject to a different tax system.
Consider the following scenario:
George is the owner of a rental property/properties (a landlord).
George receives an annual income, A, from his job. Additionally, his rental property yields an annual income of B, resulting in a total income of A+B.
However, he is obligated to pay an annual mortgage cost of C for this property and incurs yearly maintenance expenses of D.
Before 2017, George’s total taxable income was calculated as A + (B – (C + D)).
Following the full implementation of Section 24 after 2021, Fred’s taxable income will be simply determined as A + B – D.
There may be a potential 20% tax reduction based on lower finance costs, property business profits, and adjusted total income, as outlined above.
Section 24 of the Tax Code represents a significant regulatory change that has altered the tax treatment of mortgage interest for landlords. Staying informed about the implications of this provision is essential for letting agents and landlords make informed decisions regarding property investment and management.
Alternative Routes to Section 24
There are ways to increase your profitability without selling your properties or passing on the cost increases to your tenants.
Limited Company Route
Transferring your properties to a limited company might be a good idea if you own a rental property portfolio. Limited companies are exempt from Section 24, so 100% of the interest can be offset against tax as a business expense. Plus, the UK corporation tax rate is much lower than the 40% higher band tax rate.
However, you should get advice from your accountant before taking this step; it’s not the right option for everyone. You might be required to pay stamp duty and capital gains tax if you transfer a property to a company. You may be liable to double the tax charge. And finally, it can be more challenging to get a mortgage as a company and more expensive than a Buy to Let Mortgage in your name.
The Partner Route
Another potential method is to transfer your properties to a lower-income partner or transfer some or all of the income through a legal Partnership arrangement validated by HMRC.
Transferring property in this way can help you reduce the tax payable on rental income. If the landlord’s partner pays either basic or no tax at all.
A word of warning before you engage in either option. It is important to seek an accountant’s advice to ensure you are taking precautions to protect your finances and properties. You can speak to Lynne for more information on Section 24.
