Understanding the Tax Implications of Section 24 of the Landlord and Tenant Act

The Landlord and Tenant Act is an essential legislation that governs the relationship between landlords and tenants. One particular provision of this act that has garnered significant attention and impact is Section 24. Introduced in 2017, Section 24 brings about substantial changes in the tax landscape for landlords in the United Kingdom. In this article, we will delve into the tax implications that landlords need to be aware of under Section 24.

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.

Stage one
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.

Stage two
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.

Stage three

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.

Stage four
By April 2021, you will only be able to claim tax relief at the basic rate level of 20%.

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:

1. 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.

2. 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.

3. 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.

Section 24 of the Landlord and Tenant Act brings significant tax implications for landlords, particularly through the phased reduction of mortgage interest relief. Landlords must adapt their financial strategies, consider alternative business structures, and seek professional advice to navigate the changing tax landscape effectively. By staying informed and proactive, landlords can minimize the impact of these tax changes and maintain a sustainable rental business.