What is Section 24?
Section 24 of the Landlord and Tenant Act, also known as the "Tenant Tax" or "Buy-to-Let Tax," aims to restrict the tax relief available to landlords on mortgage interest payments for residential properties. Prior to the implementation of this provision, landlords could deduct their mortgage interest payments from their rental income, reducing their taxable profit and ultimately their tax liability. However, under Section 24, this deduction is being phased out, resulting in potentially higher tax burdens for landlords.
Phased Reduction of Mortgage Interest Relief
The implementation of Section 24 brings about a phased reduction of mortgage interest relief for landlords. Prior to April 2017, landlords could deduct the full amount of mortgage interest payments from their rental income. From April 2017 to April 2020, the tax relief on mortgage interest payments was gradually reduced, with landlords receiving a basic rate tax reduction instead. Starting from April 2020, the tax relief is completely replaced by a basic rate tax deduction.
From April 6th 2017, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.
From April 6th 2018, the amount of tax relief you can claim at the higher rates will drop to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.
From April 6th 2019, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.
By April 2021, you will only be able to claim tax relief at the basic rate level of 20%.
Impact on Higher and Additional Rate Taxpayers
One of the key implications of Section 24 is its impact on higher and additional rate taxpayers. Previously, landlords in these tax brackets could claim tax relief at their highest marginal rates. However, with the phased reduction of mortgage interest relief, the tax relief is now capped at the basic rate of tax, currently set at 20%. This means that higher and additional rate taxpayers may experience a significant reduction in the amount of tax relief they can claim, leading to higher tax liabilities.
“The government has persistently targeted landlords with tax changes and more red tape over recent years. Rental yields continue to be stressed with tax changes over the years. Section 24 FA 2015 now found within tax legislation at Section 272A Income Tax (Trading and Other Income) Act “ITTOIA” 2005 provides for the mortgage interest restriction to take effect over the course of 3 years commencing 6 April 2017 with the full effect taking place on 6 April 2020, so the law already provides for the changes to take place.
There is a serious possibility of landlords with highly geared portfolios, finding themselves in a position of having to pay tax in situations where they have not even made a real profit, i.e. a 40%/45% taxpayer receiving £10,000 of rental income and paying £10,000 in mortgage interest thus making no real profit, will find themselves paying £2,000/£2,500 in tax (2020/21).
Considerations for Landlords
Given the changes introduced by Section 24, landlords should consider the following:
Review Financial Projections: Landlords should assess the financial impact of reduced tax relief on mortgage interest payments and incorporate these changes into their financial projections. It is crucial to account for potential increases in tax liabilities when making long-term investment decisions.
Explore Business Structures: Landlords may consider incorporating their rental activities into a limited company structure. Limited companies are not subject to the same restrictions on mortgage interest relief, and the tax implications can be different. However, transitioning to a limited company structure should be carefully evaluated, taking into account individual circumstances and seeking professional advice.
Seek Professional Advice: It is essential for landlords to consult with tax advisors or accountants who specialize in property taxation. These professionals can provide tailored guidance, ensuring compliance with tax regulations and identifying opportunities to optimize tax efficiency within the bounds of the law.