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‘Section 24’, the controversial amendment to the UK tax code, which has restricted landlords’ from deducting “finance costs” incurred by a landlord’s rental business (including interest payments on loans, mortgages and overdrafts, and any costs associated with arranging them) from their taxable rental income.
But obviously the amendment is really all about mortgage interest payments, because that’s where and how it’s really going to impact landlords en masse.
In other words, the interest on mortgage debt is no longer tax deductible like it used to be, which means many landlords have found themselves with significantly higher tax bills than before.
Needless to say, section 24 has been game-changing – in the worst possible way – it’s resulted in many rental businesses running on wafer thin margins, if not completely uneconomical, for private landlords.
If you’re a landlord or interested in becoming one, it’s critical to understand how Section 24 of the Finance (No. 2) Act 2015 might impact your finances, ’cause the reality is it could easily cripple your business and/or shape your future plans.
Page contents
- Overview of what Section 24 means for landlords
- Does Section 24 apply to you?
- The definition of “finance cost” (which expenses are not tax deductible under Section 24)
- How Section 24 works
- The impact of Section 24 on landlords
- How can landlords offset and manage Section 24?
- WARNING: avoid Section 24 tax avoidance schemes (there are NO loopholes)
Overview of what Section 24 means for landlords and their tax liability for their rental business
- Section 24 applies to all landlords with residential rental properties in the UK.
- Landlords used to be able to offset “finance costs” (e.g. interest payments on mortgages) against their taxable rental profits, that is no longer the case.
- The Government suggests 1 in 5 landlords was affected by the change.
- The restriction was introduced in April 2017, and was fully implemented by 2020 – 2021.
- Landlords can claim a tax reduction at the restricted rate of basic rate @ 20% on mortgage interest payments (this means higher rate taxpayers can no longer claim the tax back on their mortgage interest payments, as the credit only refunds tax at the basic 20% rate).
- Lower rate taxpayers may find themselves pushed into a higher rate of taxation due to the change (because now landlords can’t offset the interest on loans against their tax liability, therefore the cost will be added to the taxable income total on their tax return).
- This will mostly affect landlords with large mortgage debts, especially portfolio landlords. It’s theoretically possible that some may find themselves paying more tax than they have actual income. Scary!
Does Section 24 apply to you?
Meh, I dunno.
Maybe.
I hope not.
- Section 24 applies to individuals with residential property businesses;
- They do not apply to companies.
- They do not apply to land and property dealing or development businesses, commercial lettings or Furnished Holiday Lets.
So if you don’t manage your BTL business through an incorporated company and your rental property(ies) have interest bearing debt, then Section 24 will almost certainly apply. The question of how much it will impact you will depend on which tax band you fall into.
If your rental business is loving life debt free (congratulations), then Section 24 will not impact you.
My suggestion is to talk to a landlord tax accountant to determine your position so you can plan accordingly and make any necessary provisions to your BTL business.
Actually, that makes for a perfect opportunity to segue onto my boilerplate disclaimer – you know the drill: I’m not a qualified tax professional, so none of this is financial or legal advice. In fact, I’m offering the exact opposite of that (I’m not actually quite sure what that means in real terms, but you get my point).
The definition of “finance cost” (which expenses are not tax deductible under Section 24)
Section 24 states that from 2021, expenses that fall under “finance costs” will no longer be tax deductible, but obviously that alone is kind of ambiguous so isn’t helpful.
What “finance costs” is referring to is any cost associated to accessing finance on a rental property, including interest on loans and incidental costs, such as arrangement fees and commission.
As per the HMRC Property Income Manual (PIM2054):
Interest and other finance costs on loans taken out for a property business which involves the letting of residential properties.
Any payments which, although not described as interest, are made in connection with a relevant loan and are economically equivalent to interest in the hands of the recipient.
Any incidental costs incurred in obtaining the loan. This includes items such as fees or commission payments, but would exclude, for instance, exchange rate losses on a loan taken out in a currency other than sterling.
So, in other words, the following expenses are not tax deductible:
- Interest on loans
- Mortgage arrangement/admin fees (I’ve written a more in-depth blog post on whether BTL mortgage fees are tax deductible as it seems to be a point of contention, even though the legislation seems clear to me)
- Commission paid to brokers
- Penalties associated with any loans (e.g. mortgage overpayment fees)
How Section 24 works
As part of the 2015 Summer budget, the Chancellor of the Exchequer, the pompous twit George Osborne, announced that from 2017, the Government will progressively stop landlords from being able to use the full cost of our mortgage interest payments as an expense to offset against our tax bill, which ultimately means many private BTL landlords will see their tax bill go through the freaking roof!
Landlord tax liability examples (before and after Section 24)
HMRC provide a couple of case studies to demonstrate how Section 24 can impact a landlord’s taxes (although the tax rates and bands they use are now out of date).
I’ll use one case study (example #2) as a template but I’ll adjust it to use the latest Income Tax rates (2023) and adjust the figures to show you how a landlord can get pushed into a higher tax bracket:
Key figures
- Tax relief available for mortgage interest payments – 20%
- Personal Allowance (Up to £12,570) – 0% tax rate
- Basic rate (£12,571 to £50,270) – 20% tax rate
- Higher rate (£50,271 to £125,140) – 40% tax rate
- Additional rate (over £125,140) – 45% tax rate
Case study: impact before and after Section 24
John’s an individual with self-employment income of £47,000 and rental income from residential property of £18,000 per annum.
His mortgage interest is £8,000 per year.
Property income calculation:
Rental income = £18,000
Finance costs (£8,000) = nil deduction
Other allowable expenses = £2,000
Property profits = £16,000
Total income = £63,000
Income Tax calculation:
£12,570 x 0% = £0
£37,700 x 20% = £7,540
£9,730 x 40% = £5,092
Income Tax Total: £12,632
Less 20% tax reduction for finance costs:
£8,000 x 20% = -£1,600
Final Income Tax = £11,032
After the introduction of Section 24, John has become a higher rate taxpayer because of the change as his total income is more than the higher rate threshold of £50,270.
Tax bill is £11,032 with Section 24.
Tax bill is £7,540 before Section 24.
Needless to say, that’s a frightening change from what we were used to. End of a golden era for many. Sigh.
The impact of Section 24 on landlords
As a result of this change, many thousands of landlords will find themselves being taxed on loss-making buy-to-let properties and see massive increases in the percentage of tax payable. Many will be shoved upwards into a higher rate tax bracket, even though in reality they will not be making a single penny of extra income!
It will also mean that the idea of becoming a landlord will become less feasible and attractive to many people.
It should also be noted that the Government already collects tax on the mortgage interest paid by landlords – it takes it from the profits made by the mortgage lenders. So not only does the legislation victimise individual mortgaged landlords, it’s also a double taxation policy.
And of course, inevitably, as it always does, these extra costs will quickly find their way filtering down to the bottom of the chain, all the way to the tenants, which will further increase rental prices in an already unmanageable market.
I refuse to believe the Government aren’t aware of how this will pan out, because it really just boils down to basic economics (i.e. if you increase production costs, the retail price of the commodity has to increase), so it kind of makes you wonder who screwed who to make this ludicrous legislation happen. Others feel the same, and that’s why they’re calling it the “Tenant Tax”
How can landlords offset and manage Section 24?
First and foremost, I must reiterate the point I have already made, which is to talk to an accountant that is familiar with landlord tax, and find out how much of an impact Section 24 has on your finances, and then plan accordingly. Do the maths, and stress-test the figures.
I’ve already written several posts on how landlords can save money, which may help you reshape and maximise your profits. But I’ll go over a few of the main ones below.
While you should already be doing the following regardless, for both short and long term gains, I appreciate we don’t all start swimming until we’re thrown into the deep end…
*The Landlord kicks you into the deep end*
- Remortgaging
It’s still a massive mystery to why so many homeowners (not just landlords) don’t look at remortgaging at every given opportunity. Relatively speaking, it’s by far the easiest and quickest way to massively rein in the outgoings!Even if you can find a mortgage product that offers a puny 0.1% reduction in interest, you could still potentially save thousands, and therefore instantly absorb the costs of the repulsive new tax legislation in one hit!
If you’re interested, here’s a more detailed write-up of my most recent experience of remortgaging a BTL.
- Make a lump sum payment to reduce mortgage
You never know, reducing some of your mortgage debt with lump-sum payments may work out better for you. Equally, it might be worth switching to a repayment mortgage if you’re currently paying interest-only. This is where a good tax accountant will be invaluable. - Regularly look for better deals
I honestly believe most landlords miss a trick when it comes to service renewals (i.e. insurance, agency fees etc.), and that’s mostly due to obscene levels of laziness.Companies that work on the premise of annual subscriptions prey on laziness. They rely on people to avoid the 10-20 minute chore of looking for a better deal when it’s time to renew a policy, which is typically once a year. The sad reality is, most people are THAT lazy, so they just go ahead and renew the policy with their existing providers.
9 out of 10 times, your existing provider won’t be offering you a competitive deal. They’ll be offering you the “lazy asshole” deal, which is usually 30% more expensive.
Last time I shopped around before renewing my landlord insurance policy I saved £250, and it took about 20 mins.
PLEASE, just shop around when it’s time to renew! Do it for me and your children.
- Minimise void periods
Be organised and minimise void periods in-between tenancies.Think about it, by simply slowing down the process of finding new tenants by 2 weeks, you can easily lose £400 in rent (based on rent being £800 PCM). Even if you half that period by working a little quicker, you’ll save £200. It really does boil down to being organised and prepared.
There’s more information over at the finding tenants quickly section!
- Obey the law
This is a bit of a quirky one, and perhaps it has no place in this list. But screw it, I’m doing it…Landlords are continuously being persecuted for failing to comply with the law. Actually, this is probably one of the quickest ways to evaporate profits into a puff of smoke, and it’s definitely more devastating than any tax clause.
Be a good boy, comply with your landlord legal obligations if you aren’t already. It’s so much cheaper than being sued.
- Avoid & prepare for bad tenants
See, the thing is, while this whole tax legislation is unfair and will jeopardise your monthly Range Rover lease payment, one asshole tenant can jeopardise your entire fortune.Reduce the chances of harbouring donkey tenants by undergoing thorough tenant referencing. But just as crucially, always prepare for donkeys (because sometimes they’re just unavoidable) by keeping tenancies short, having a tenant and considering RGI (Rent Guarantor Insurance).
Let me reiterate, good tenants are crucial to turning a healthy profit. You will NEED good tenants to help you through the tough times.
- Minimise tenant turnover
The most important point in the list, in my opinion.If you have good tenants, don’t do anything stupid like unnecessarily increase rent. Keeping rent reasonable/low in exchange for retaining good tenants is almost always cheaper than pissing off good tenants and giving them a reason to terminate the tenancy.
Despite popular belief, increasing rent isn’t the best way to survive in a tough environment. The best way to survive is keeping the cash flow steady, and you cannot do that without good tenants. I’m not saying don’t increase rent, I’m saying you might be better served being ‘reasonable’ over brash.
- Scale back if you’re struggling
If you’re fortunate enough to be a portfolio landlord, it might be worth selling a few of your properties and using the capital to reduce mortgage debt on the remaining. It’s a move that will undoubtedly be a kick to the ego to those that like accumulating, and it is a gamble, because the legislation might get squashed. It’s your call.It is extreme, but so is bankruptcy. There’s also a lot to be said about coasting through life in comfort as opposed to fear.
- Offset every expense like your life depends on it
Stack up every expense you can against your tax bill.While you may lose the ability to offset your interest payments, there maybe other expenses that you can offset, which you currently aren’t e.g. the cost in fuel for going back and forth to your BTL, the cost of your PC which runs your landlord software on, even the cost of communicating with your tenant and/or agent, and the food consumed during renovation periods etc. Again, a good tax accountant will let you know what you can get away with. The really good accountants will manage to find a way to offset pretty much anything, including a pair of nail-clippers.
Offset every last fucking penny.
- Operate as a company
According to this article on ThisIsmoney it might be worthwhile operating your portfolio through a company if you have 10+ properties, because you’ll benefit from company tax breaks that are otherwise unavailable to private landlords. But bear in mind, there are added costs and hassle associated with running a company.Again, a good accountant will be invaluable here!
If you’re not doing ALL of the above (which is only the tip of the iceberg), I have no doubt in mind, you’ll be able to find ways to absorb more nose-bleed costs than your balance sheet is currently showing.
Workout how much this tax change is going to cost you, and make the changes you need to make in order to absorb the shit out of it.
WARNING: avoid Section 24 tax avoidance schemes (there are NO loopholes)
Unfortunate.
But the emergence of opportunistic dip-shits selling snake oil was always inevitable once Section 24 was thrown into the agenda.
Dan Niele, of Tax Policy Associates, a highly reputable Tax Lawyer with qualifications leaking out of his every orifice, has been at the forefront of the war against companies targeting unsuspecting landlords, offering baloney “tax saving” structures that are no more than ineffective tax avoidance schemes.
“Section 24 has created an industry of dodgy advisers preying on landlords with magic solutions. None of them work.“
– Dan Niele, Tax Policy Associates
Alas, many landlords have already taken the bait – opted into structures that supposedly fixes the problem (i.e. reduces the tax burden created by Section 24) – only to discover they don’t work, and are now dealing with the harsh realities of further expenses to untangle themselves from the mess.
I know we all want to believe in the magic pill – one that will reduce our tax liabilities into a tiny stump, but I don’t know what to tell you, other than… there isn’t one!
Renting out properties is a simple business, so for better or worse, our options are simple and limited (as explained by Dan in this post, “There are three choices, and only three choices.”):
- Incorporate – Instruct a proper tax adviser, incorporate a company, and move the business to that company. The mortgage interest will then be fully deductible against the company’s corporation tax.
- Don’t incorporate – in other words, continue as you are, bearing the cost of the section 24 non-deductible interest.
- Sell up – if section 24 simply makes your rental business uneconomical, you may need to sell-up.
If anyone is trying to sell you another option to reduce your tax liability, particular complex structures which involve Trusts, LLPs, offshore arrangements, then I suggest you take on board the words of one of the most highly regarded and qualified Tax Lawyers in the country, “not only are they very likely to fail when challenged, but the consequence could be much much worse than if you’d done nothing at all.”
So I really can’t overstate it enough, there are three choices, and only three choices. Don’t get lured in by weird and convoluted tactics because they sound impressive. Simple is cool. Simple is safe!
Good luck everyone!
Landlord out xo
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.
Good post- although you've come late (which is a bit ironic considering your premature ejaculation problem).
1) Were you aware of the new tax legislation?
Yup, I had a whiff of it a couple of years ago from a very good source. But I didn't believe any government would be daft enough, let alone a Conservative one. It did give me pause for thought however and I made some adjustments. Since this came in I've been busy, hence not posting for a while.
2) are you going to support/donate to the campaign?
I've surrogate contributed from the £10000 NLA donation. I reckon Shelter should bung in a hefty contribution as well if they genuinely want to help tenants. End of the day though, however unfair, this will weed out the competition.
3) how is the legislation going to affect you?
I'll pay more tax but I'll be better off and do less work.
4) have you made any preparations for the change, or are you going to? I know of a few landlords that are currently scaling back their portfolio, and taking advantage of the insanely high property prices!
Yep, deleveraging, sold some and continuing to do so, putting up rents and building up reserves. I've sorted some of my mortgages onto 5 year fixes and kept the lifetime BofE +2% ers. I've now got out of DSS.
I've also got reserve plans of sweating the properties more but that would mean a lot more work.
"If you have good tenants, don’t do anything stupid like unnecessarily increase rent. Keeping rent reasonable/low in exchange for retaining good tenants is almost always cheaper than pissing off good tenants and giving them a reason to terminate the tenancy."
With no respect whatsoever, that is complete bollocks which I suspect you have posted to appease the HPC nutters. I have half a dozen properties I want to get rid of with crap yields. I have phased in 10% rent increases to good tenants as I want one of them to move to utilise the annual CGT allowance. They have all paid up and have no intention of leaving. It will be the same phased increase again next year.
I have been lucky with voids on the remainder, only getting them one at a time. Usually I get none for ages then 5 all at once. Because I have been in this position, I have been able to push rents. Market rent + 5 or 10%. How many times have you heard some muppet say they charge below market rate to get good tenants? Well if they are charging below average, it follows that someone (me!) is charging above. And it makes not a blind bit of difference in getting good or bad tenants. I've also noticed, definitely in a couple of cases, that letting agents are following suit and I have set new market levels.
Whilst you might not be much affected by this now, have you considered they might go further and scrap interest 'relief' altogether? And by the same rationale, why should you be able to offset costs of replacing a boiler but 'hard working homeowners' cannot? Another anti-business playing field leveller?