Most landlords were paying increased taxes, yet they were not making the right money. However, what is Section 24, and how does it really affect your property business? Section 24 is a tax change that has greatly impacted the rental income since it was introduced to the market, should you be a landlord in the UK.
Simply put, it limits the mortgage interest deductions that you are allowed to claim on your rental income.
However, there is no need to panic, as there are ways to go around these changes by knowing what Section 24 involves. This guide discusses the rationale behind the introduction of Section 24.
Moreover, its functionality and what a landlord can do to ensure that it does not affect their income and overall tax bill, and gives tips on how to deal with it.
What is Section 24 in the UK?
Section 24 is a part of the Finance Act 2015, which changed how landlords calculate tax on rental income. Landlords were previously able to offset 100% of mortgage interest and other finance expenses (such as loan charges) from their rental profits to reach their taxable amount.
But from 2017 to 2020, this relief was gradually phased out under Section 24, Finance Act 2015. Landlords are no longer able to offset mortgage interest and other arrangement fees from their rental income. Instead, they receive a 20% basic rate tax credit on their finance costs.
This means landlords paying more or higher rates of tax (40% or 45%) now pay increased tax bills as the relief is only allowable up to the basic rate, regardless of their income band.
In simple terms, Section 24 changes your tax on rental gains and not your actual gains. It affects your taxable income, normally making it appear bigger than it is.
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Why was Section 24 Introduced?
The government introduced Section 24 in the first instance to level the playing field between homeowners and landlords in terms of taxation.
Landlords had the tax advantage of claiming mortgage interest as a deduction from their taxable income. On the other hand, the homeowners couldn’t claim the same allowances on their own mortgages.
By introducing Section 24, the government aimed at:
- Levelling the playing field between homeowners and landlords.
- To control the rising property prices, driven partly by buy-to-let investors competing with first-time buyers.
- Increase funding from private landlords to fund public spending.
In short, Section 24 was introduced to curb the abundance of the buy-to-let sector and require landlords to pay more tax in accordance with their actual income.
This tax rule, also known as the “landlord tax” or “mortgage interest relief restriction,” has tackled how rental income is taxed since its full implementation in 2020.
What is the Purpose of Section 24?
The intent of Section 24 was not to punish landlords but to promote a more level playing field for housing. The purpose of section 24 is essentially to limit the tax advantages of landlords.
By restricting relief to the basic rate, it hits the higher and additional-rate taxpayers who own rental property harder.
The idea was to discourage speculative investments in buy-to-let and get more properties in the market for owner-occupiers to purchase.
It limits the relief you can recover on mortgage interest and other charges for borrowing, potentially raising your taxes and reducing profit margins.
It is said by its critics that it hasn’t succeeded in doing that completely, as house prices are still rising, but it has forced landlords to think deeply about their portfolios at least.
But most landlords argue the policy has serious consequences, such as reducing rental availability, pushing out small landlords from the market, and an increase in rents.
But overall, the intention is clear, to end up with a better-balanced housing market and do away with what was deemed an unfair system of tax relief.
You can also read our detailed guides on:
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How Does Section 24 Work?
Now, down to the nitty-gritty: how does Section 24 work? It is not as complex as it appears when you break it down. You work out your rental income as usual, that’s the rent you receive from tenants, along with any extra payments for furnishing or services such as cleaning or utilities. You then subtract your allowable expenses.
But this is where the key difference arises: now, finance costs such as mortgage interest are no longer deducted here. You work out your taxable profit without subtracting those costs.
Understanding how Section 24 works is key to managing its financial impacts.
Let’s look at a simple comparison:
| Before Section 24 | After Section 24 |
| Rental income: £15,000
Mortgage interest: £5,000 Taxable income: £10,000 If you’re a higher-rate taxpayer (40%), tax = £4,000 Basic rate tax credit (20% of £10,000) =£2000 |
Rental income: £15,000
Mortgage interest: £5,000 (cannot be deducted) Taxable income: £15,000 Tax at 40% = £6,000 Basic rate tax credit (20% of £5,000) = £1,000 Final tax = £5,000 |
You can see the difference, the tax increases even if your rental income hasn’t risen. This can cause landlords to appear as if they are earning more and be pushed into a higher tax band.
That is, Section 24 is a reduction of the tax relief on mortgage interest, which increases your total tax amount.
What Comes Under Section 24?
Section 24 covers individual landlords and partnerships letting residential property. It does not cover:
- Limited companies (incorporated landlords)
- Commercial property lettings
- Furnished holiday lets (FHLs)
The most significant costs, Section 24 has excluded, are:
- Mortgage interest payments
- Borrowings to buy furnishings
- Borrowings to buy or improve a rental property
- Overdrafts relating to the property business
In effect, all finance costs of your residential letting business are now undertaken by the Section 24 restriction. This is to the effect that private landlords can no longer claim mortgage interest as a business cost in calculating taxable profit.
What Does Section 24 Mean for Landlords?
From a landlord’s point of view, Section 24 is a big shift in the way they consider their income for tax. Although your profit is still the same (i.e., the income after expenses), your taxable profit, the amount HMRC takes to calculate your tax, is increased.
Section 24 means more cost of having and letting a mortgaged property. The worst hit are those who rely intensely on mortgage finance.
Technically, Section 24 discourages money borrowed to buy real estate investments (with mortgages) compared to cash buying or company ownership deals.
For example:
Suppose you have £20,000 in rent and pay £10,000 in interest on the mortgage. Your real income is £10,000. HMRC under Section 24, however, taxes you as if you earned £20,000, giving you only a 20% tax credit on the £10,000 interest.
This has several effects:
- Some landlords are pushed into higher tax bands.
- Personal allowances can be reduced when total income reaches £100,000.
- Tax bills increase even when rental income doesn’t.
Briefly, Section 24 has increased your taxable income, and planning is more important than ever. For low-rate taxpayers, the effect is zero or minimal, but for high earners, it adds thousands to their accounts. It is a change where rental income is taxed more similarly to employment income, without business expense deductions in full.
How Can Landlords Offset and Manage Section 24?
Even though Section 24 cannot be avoided completely, there are several strategic steps that landlords can adopt to deal with its effects and reduce their tax burden. Some of the workable ways are:
1. Bring Your Property Business into a Company
Section 24 does not affect limited companies, and hence some landlords have brought their portfolios within a limited company structure.
Limited companies can even claim mortgage interest as a business expense. Corporation tax rates (currently 25%) are generally lower than rates of higher-rate income tax.
But incorporation has legal, financial, and tax consequences, including potential for Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications. Always seek professional advice before the transfer of ownership.
2. Reduce Mortgage Debt
Pay off some of your mortgage to save money on interest, offsetting the Section 24 effect. Make overpayments where financially possible.
3. Enhance Property Efficiency
Review and evaluate your portfolio and identify poorly performing properties. Selling low-yielding properties and investing in higher-yielding ones can offset higher tax liabilities.
4. Claim All Other Allowable Expenses
Though you cannot offset mortgage interest, there are many other costs you can claim, including:
- Repairs and maintenance on properties
- Letting agent fees
- Insurance premiums
- Accountancy fees
Ensure you record all allowable expenses to minimise taxable profit.
5. Invest in Furnished Holiday Lets
Furnished Holiday Lets (FHLs) are exempt from Section 24. If your property qualifies, you have the right to claim full mortgage interest allowances and enjoy other tax benefits such as capital allowances.
6. Joint Ownership Planning
When you own a property jointly with your spouse or partner, transferring the property to the lower-income earner can reduce your overall tax liability.
7. Consult a Professional Accountant
A property tax specialist will enable you to plan your finances strategically, find reliefs, and remain compliant while optimising profitability.
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What Happens If You Ignore Section 24?
Failing to comply with Section 24 correctly can result in unpaid tax and even HMRC fines. Some landlords are making the error of continuing to deduct mortgage interest as an expense, resulting in inaccuracies in their Self Assessment tax returns.
To avoid issues:
- Use up-to-date accounting software or a qualified accountant.
- Check HMRC guidelines regularly each year.
- Maintain accurate, detailed financial records.
Complying the right way keeps you away from unnecessary stress and penalties during tax season.
The Future of Section 24 – Will It Change?
The majority of landlords and property associations have lobbied for the reformation or reversal of Section 24 on the basis that it discourages investment in the private rental housing sector. However, so far, the government has not shown any flexibility to reverse the law.
Despite this, tax laws governing property ownership will continue to evolve, especially with the government’s bid to encourage green homes and professional property management. Staying updated and planning properly will remain the key for all landlords.
The Bottom Line
In short, Section 24 has turned the game for landlords, but with smart planning, you can still come out on top. Stay informed, as taxation laws change, and never hesitate to consult HMRC or a professional for your situation.
Section 24 has revolutionised the UK property investment landscape. Section 24 prohibits mortgage interest that can be claimed by landlords from rental income, substituting it with a tax credit of 20%. While Section 24 was intended to create a fairer housing market, it has also brought extra costs for landlords and, in some cases, even increased rents for tenants.
Understanding how Section 24 works, what it covers, and how its impact can be avoided is essential for anyone who has an interest in residential letting. With planning and professional advice, landlords can still enjoy profitable, under a post-Section 24 regime.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.