Let’s dive straight into a topic that is a hot button issue for landlords: Section 24 Tax, often referred to as the “landlord tax.” We’ll break down what it is, how it impacts landlords, and, most importantly, what you can do about it.

What is Section 24 Tax?

If you’re a landlord, especially one with a mortgage, you’ve probably heard about Section 24 Tax. Officially introduced by the UK government a few years ago, it has gradually affected how landlords can claim tax relief on their profits, particularly those with buy-to-let mortgages.

Section 24 changes the landscape by altering how tax relief is calculated. Traditionally, landlords could deduct mortgage interest from their rental income before calculating their tax bill. However, under Section 24, this deduction is limited, which can result in landlords paying tax on what seems like “phantom” profits—essentially, you might owe tax even if you haven’t made a real profit. This is because Section 24 taxes your turnover, not just your profits.

How Does Section 24 Affect Landlords?

If you don’t have a mortgage on your rental properties, Section 24 might not concern you much. However, for those with mortgages, this tax change can have significant financial implications.

Under Section 24, landlords receive only a 20% tax credit on mortgage interest payments, instead of deducting the full amount from their taxable income. This means higher tax bills for many, sometimes without the cash flow to easily cover these taxes. The impact is particularly severe for landlords in higher tax brackets who previously could deduct mortgage interest at their marginal tax rate of 40% or 45%.

Do You Have to Pay It?

Simply put, yes. If you’re a landlord affected by Section 24, you’ll need to pay tax based on your rental turnover. While you can still claim other expenses like legal fees and maintenance costs, the significant change here is the limited relief on mortgage interest.

The government introduced Section 24 ostensibly to level the playing field between homeowners and buy-to-let landlords, as homeowners can’t claim mortgage interest as a deductible expense. However, many landlords see this as more of a tax grab, overlooking the fact that landlords are running a business.

Are There Any Landlord Loopholes?

One common response to Section 24 has been for landlords to incorporate their property business. By transferring properties to a limited company, you can sidestep the harshest effects of Section 24. Within a limited company, you can deduct the full amount of mortgage interest before paying corporation tax, which is often lower than income tax rates.

However, incorporating isn’t without its challenges. It can be slightly more complex and expensive administratively, and if you’re moving properties from personal ownership to a company, there could be tax implications, such as capital gains tax and stamp duty. The process can be easier for those with multiple properties, particularly if they are considered a “going concern”—generally, having eight or more properties could qualify.

The Importance of Professional Advice

If you’re a landlord feeling the squeeze from Section 24, or you’re just starting out in property investment, getting professional advice is crucial. While incorporating might seem like a straightforward solution, it’s not suitable for everyone, and the rules can be complex.

Consulting with a qualified property accountant is your best next step. They can provide tailored advice on whether incorporating is right for you and guide you through the process if it is. Remember, we’re not tax advisers, but we can connect you with the right professionals to help you navigate these changes.

Final Thoughts

Section 24 Tax has fundamentally changed the landscape for landlords with mortgages. While it can create financial pressure, there are strategies, such as incorporation, that can help you manage your tax liabilities more effectively. The key takeaway? Don’t go it alone—seek professional advice to ensure you’re making the best decisions for your property business.

If you’d like to be connected with a trusted property accountant or need more detailed advice, click the “Talk to Us” button on our website. We’re here to help you navigate these challenges.