What is Section 24 and how does it affect landlords?

So you might be asking yourself, what is Section 24? Navigating the world of tax regulations can feel like a constant battle. It’s something that all landlords will have to face. Therefore, we have put together this comprehensive guide to provide clarity and understanding while also exploring some potential strategies for navigating the post-Section 24 landscape. 

What is Section 24?

Let’s first explain what we mean by Section 24. This refers to a significant change that was introduced in 2015 by then-Chancellor George Osborne. It fundamentally changed how landlords in the UK could claim tax relief on residential rental income.

Before it was implemented, landlords received a significant tax benefit. They could deduct all of their mortgage interest payments from their rental income before calculating their tax liability. This meant they only paid tax on their net profits, significantly reducing their overall tax costs.

Once it was introduced, the ability to deduct mortgage interest was restricted. Landlords can now only claim tax relief at the basic income tax rate against their mortgage interest payments. This has resulted in higher tax costs for many landlords.

Why was it introduced?

The government implemented Section 24 for various reasons. Firstly, by making buy-to-let investments less attractive from a tax standpoint, the government aimed to discourage high-earning individuals from entering the market solely for tax benefits. This was thought to help first-time buyers by increasing the availability of properties, particularly in areas of high demand.

Section 24 also aimed to create a fairer comparison between those buying a property to live in and those buying to let. Previously, the full mortgage interest deduction gave landlords a significant tax advantage compared to owner-occupiers.

The impact on landlords

The introduction of Section 24 has without a doubt impacted landlords in several ways. The most immediate and significant impact is the increased tax bill. Landlords are now paying a higher amount of tax on their rental income due to the restricted mortgage interest tax relief. 

Here is an example of how it has impacted landlords:

Let’s say the annual rental income was £20,000, the annual mortgage interest was £10,000, and the tax rate was 20%.

Before Section 24

Before Section 24, the tax calculations looked like this: 

Tax Calculation:

1. Profit before Tax: Rental Income – Mortgage Interest = £20,000 – £10,000 = £10,000
2. Tax Liability: Profit before Tax x Tax Rate = £10,000 x 20% = £2,000 

Once Section 24 was implemented, the tax calculations changed to look like the following:

Tax Calculation: 

1. Tax Relief on Mortgage Interest: Mortgage Interest x Tax Rate = £10,000 x 20% = £2,000
2. Profit before Tax: Rental Income – Tax Relief = £20,000 – £2,000 = £18,000
3. Tax Liability: Profit before Tax x Tax Rate = £18,000 x 20% = £3,600

Impact on Tax Bill: 

As you can see below, the impact on a landlord’s tax bill is that tax is higher. 

• Before Section 24: Tax liability = £2,000
• After Section 24: Tax liability = £3,600

As you can see in this example, the landlord’s tax bill has increased by £1,600 due to the restricted mortgage interest tax relief under Section 24. This demonstrates the significant financial impact on landlords as a result of this change in tax law.

This greatly impacts their overall profitability, potentially leading some landlords to rethink their investment decisions.

To offset the increased tax burden, some landlords have opted to raise rents. However, this can impact affordability for tenants and potentially lead to higher tenant turnover, creating additional challenges for landlords in managing their properties long-term.

As a result of Section 24, some landlords may consider exploring other investment options alongside buy-to-let properties. Diversifying their portfolio can help mitigate the impact of changing tax regulations and create a more robust long-term investment strategy.

Beyond Section 24: Strategies for landlords

While Section 24 has changed the landscape, there are still ways for landlords to optimise their strategies and navigate the post-Section 24 environment effectively.

Stay up-to-date with tax regulations: Staying on top of the game as a landlord is key. Landlords should stay up-to-date on current tax regulations and explore potential tax-efficient strategies. Consulting with a qualified tax advisor who specialises in property investments could also be helpful.

Build good tenant relations: Another way landlords can navigate Section 24 is by prioritising good tenant relationships and retaining tenants for extended periods, which can help minimise the impact of potential rent increases. Investing in the property and maintaining a high standard of living for tenants can foster loyalty and reduce tenant turnover, leading to a more stable income stream.

Manage operating costs: Carefully managing operating costs can also help compensate for the increased tax burden. Exploring ways to reduce expenses, such as negotiating lower insurance premiums or seeking competitive quotes for maintenance services, can improve overall profitability.

Diversify property portfolio: Landlords should consider diversifying their portfolio to mitigate the impact of Section 24, as it only applies to residential property. 

Long-term property investments: In some cases, landlords may want to consider strategic property upgrades that increase the property’s value and potentially allow them to charge higher rent. This can be a long-term strategy, but it’s important to ensure the cost-benefit analysis aligns with the local rental market.

Section 24 has significantly impacted the way landlords manage their finances and make investment decisions. While the tax landscape might evolve further, understanding the current regulations and their implications is crucial for success. By staying informed, exploring alternative strategies, and creating a long-term vision, landlords can still navigate the post-Section 24 environment effectively and maintain a prosperous buy-to-let portfolio.

Protect yourself and your investment

Legislation can change at any point, meaning it is more important than ever to make sure you and your investment are protected.

At CIA Landlords, we offer unbeatable landlord insurance that will protect you and your investments. To find out more about our services, contact a friendly member of the team on 01788 818670.