Navigating the complexities of landlord taxation has become increasingly challenging in the UK, particularly following the introduction of Section 24 tax. This legislation has significantly altered the way mortgage interest is treated for buy-to-let properties, affecting both cash flow and overall profitability. For landlords, understanding Section 24 tax is essential to ensure compliance with HMRC regulations while optimising tax liabilities.
At The Taxcom, we provide tailored advisory services for landlords, offering guidance on tax planning, allowable expenses, and strategies such as limited company incorporation to mitigate the financial impact of Section 24 tax. This guide offers a comprehensive overview of Section 24, practical examples, and actionable steps to navigate the changes effectively.
What is Section 24 Tax? Overview and Key Dates
Section 24 tax, introduced under the Finance (No.2) Act 2015, also known as the finance act, represents a major reform of landlord taxation in the UK. Section 24 is sometimes referred to as ’24 of the finance’. The main objective of the legislation is to restrict the deduction of mortgage interest and other finance costs from rental income when calculating taxable profits. Previously, landlords could deduct full mortgage interest against rental income, but Section 24 has replaced this with a basic rate tax credit system.
The changes were implemented gradually over four tax years, beginning in April 2017 and reaching full effect in April 2020. Key dates for landlords include:
- April 2017: First year of phased restriction, affecting higher-rate taxpayers
- April 2018: Second year, further reducing deductibility
- April 2019: Penultimate year of transition
- April 2020: Full implementation, mortgage interest no longer fully deductible
Section 24 was introduced as part of the Finance (No. 2) Act 2015 by Chancellor George Osborne during the budget announcement on July 8, 2015. Section 24 was phased in gradually over four years, starting in April 2017 and fully implemented by April 2020. The purpose of Section 24 was to restrict tax relief on finance costs for landlords, aiming to level the playing field between buy-to-let landlords and first-time buyers. The changes introduced by Section 24 were intended to reduce demand from buy-to-let landlords and help first-time buyers enter the property market. Section 24 tax was introduced as part of a broader government strategy to slow the growth of the private rental sector and level the playing field between buy-to-let landlords and first-time buyers.
Landlords must be aware of these dates to ensure accurate accounting and tax planning. Failure to comply can lead to increased tax liabilities and penalties from HMRC. Understanding these timelines is critical for both existing and new buy-to-let investors.
Section 24 tax changes not only impact the calculation of taxable rental income but also influence broader financial planning decisions, including property acquisition, portfolio expansion, and cash flow management. Landlords should regularly review their finances to adjust for these changes and explore opportunities for tax efficiency.
Background and History of Section 24
Section 24, often referred to as the “tenant tax,” marks a pivotal shift in the way landlords are taxed on their rental income in the UK. Introduced in 2015 as part of the Finance (No. 2) Act, this tax change was designed to address concerns about the rapid expansion of the buy-to-let market and to help level the playing field for first-time buyers trying to get onto the property ladder.
Before section 24 of income tax act came into effect, individual landlords could deduct their full mortgage interest payments and other finance costs from their gross rental income when calculating taxable profit. This meant that mortgage interest was treated as a fully tax deductible business expense, significantly reducing the tax liability for both basic rate and higher rate taxpayers. As a result, many landlords were able to keep their tax bills low, even as their property portfolios grew.
The introduction of Section 24 fundamentally changed this landscape. The government’s primary aim was to curb the growth of buy-to-let investments, which were seen as contributing to rising property prices and making it harder for first-time buyers to enter the market. By restricting the amount of mortgage interest that could be offset against rental income, Section 24 sought to make buy-to-let less attractive and encourage more properties to become available for owner-occupiers.
Under the new rules, basic rate taxpayers can now only claim a 20% tax credit on their mortgage interest costs, rather than deducting the full amount from their rental profits. For higher rate taxpayers, the impact is even more pronounced, as they can no longer deduct mortgage interest at their marginal rate, resulting in higher tax bills and, in some cases, pushing landlords into a higher tax band. This shift has led to many landlords paying more tax on their rental income, reducing their net profit and overall return on investment.
The ripple effects of Section 24 have been felt throughout the private rental sector. Many landlords have responded to the loss of tax relief by increasing rents to cover the additional tax burden, which has contributed to higher living costs for tenants. Others have chosen to restructure their property businesses by transferring ownership to a limited company, where mortgage interest remains fully deductible as a business expense. However, this strategy comes with its own challenges, including potential stamp duty charges, arrangement fees, and the need to navigate more complex tax and legal requirements.
For individual landlords, the reduction in tax relief on mortgage interest has made it more difficult to maintain profitability, especially for those with highly leveraged portfolios. The increased tax liability has prompted some to exit the market altogether, while others have become more cautious about expanding their buy-to-let holdings.
In summary, the background and history of Section 24 reflect the UK government’s efforts to rebalance the housing market and support first-time buyers, but the tax change has also brought about significant challenges for landlords and tenants alike. Understanding the origins and impact of Section 24 is crucial for anyone involved in the private rental sector, and exploring strategies such as transferring property to a limited company or seeking expert tax advice can help mitigate the effects of this complex tax change.
How Section 24 Changes Finance Costs for Buy-to-Let Landlords
One of the most significant impacts of Section 24 tax is on finance costs, particularly mortgage interest. Section 24 affects not only mortgage interest but also a range of property finance costs, including mortgage costs and other property finance expenses. These changes specifically apply to landlords with residential rental properties, fundamentally altering the way buy-to-let property income is taxed.
Under current tax laws, interest is no longer an allowable expense, so taxable income is now calculated on the gross rental income, effectively ‘grossing up’ the taxable amount.
Removal of Mortgage Interest Deduction
The most prominent change introduced by Section 24 tax is the removal of the mortgage interest deduction, meaning landlords can no longer claim mortgage interest as a deductible expense. Higher-rate taxpayers are particularly affected, as they can no longer deduct the full amount of mortgage interest when calculating taxable rental profits. Instead, landlords receive a 20% tax credit on finance costs, replacing the previous deduction.
This change has multiple implications:
- Increased tax liability: Landlords who were previously in the higher or additional tax bands now face a larger obligation to pay income tax and pay tax on their rental profits.
- Cash flow challenges: Mortgage payments are now less offset by tax relief, affecting monthly liquidity.
- Portfolio decisions: Investors, particularly those in higher tax brackets, may reconsider expanding their property portfolio or acquiring additional buy-to-let properties.
Additionally, the removal of full interest deductibility may push basic-rate taxpayers into higher tax brackets, as their taxable income is now based on gross rental income.
For many landlords, the removal of the deduction has prompted a reassessment of financing strategies, with some exploring fixed-rate mortgages, interest-only loans, or even property transfer to limited companies as mitigation strategies.
20% Basic Rate Credit
Section 24 tax introduced a 20% basic rate tax credit to replace the previous tax deduction for mortgage interest. This means that landlords of all tax bands can claim relief at the basic rate (20%) on their finance costs, rather than deducting the full cost from rental income as a tax deduction. Not all landlords are negatively affected by Section 24; for basic-rate taxpayers, the tax credit generally matches their tax rate, so their overall tax position may remain unchanged.
While this provides some relief, the practical effect is less beneficial for higher-rate (40%) or additional-rate (45%) taxpayers. In essence, higher-rate landlords face a larger tax bill under Section 24 tax, since they cannot fully offset interest costs at their marginal rate. Landlords must accurately report these changes on their tax return, and the calculation of tax liability now depends on total income, including both rental and other sources.
The introduction of the basic rate credit also emphasises careful tax planning. Landlords need to calculate net cash flow, consider allowable expenses, and explore possible mitigation strategies such as incorporation or property transfers to manage the tax impact.
Example Calculations for Basic Rate Taxpayer and Higher Tax Bracket
To illustrate the effect of Section 24 tax on how much profit landlords can make, consider the following examples:
Basic Rate Taxpayer (20%)
- Rental income: £20,000
- Mortgage interest: £8,000
- Other income (such as employment earnings) is included in total income calculations for tax purposes.
- Previously deductible: £8,000 → Taxable profit £12,000 → Tax £2,400
- Under Section 24 tax: Taxable profit £20,000 → Tax £4,000, minus 20% credit on £8,000 (£1,600) → Net tax £2,400
Higher-Rate Taxpayer (40%)
- Rental income: £20,000
- Mortgage interest: £8,000
- Other income (such as employment earnings) is included in total income calculations for tax purposes.
- Previously deductible: £8,000 → Taxable profit £12,000 → Tax £4,800
- Under Section 24 tax: Taxable profit £20,000 → Tax £8,000, minus 20% credit on £8,000 (£1,600) → Net tax £6,400
These examples clearly show how Section 24 tax impacts landlords differently depending on their tax band and how much profit they ultimately retain. The introduction of Section 24 has led to many landlords paying more tax than they did before its implementation. Additionally, the average national asking rent has increased significantly since the introduction of Section 24, reaching £1,341 by Q4 2024. Higher-rate taxpayers see a significantly higher liability, which underscores the importance of strategic tax planning.
Claim Tax Relief and Track Allowable Expenses
While Section 24 tax restricts the deduction of mortgage interest, landlords can still reduce their taxable profits through allowable expenses and other costs, such as operational and maintenance expenses. Properly tracking and claiming these expenses is critical to ensuring compliance with HMRC and maximising tax efficiency, as well as understanding your overall tax position. Despite restrictions on finance costs, landlords can still fully deduct allowable expenses like letting agent fees and property insurance.
Understanding Allowable Expenses
Allowable expenses are costs incurred wholly and exclusively for the rental property. These can be deducted from rental income to reduce taxable profits, even under Section 24 tax.
It is important to note that capital expenditure, such as property extensions or improvements, is not deductible as an expense. These are treated separately for tax purposes, often affecting capital gains tax calculations when the property is sold.
Tracking Expenses for Maximum Efficiency
Efficient record-keeping is essential under Section 24 tax. HMRC requires landlords to maintain accurate records of all income and expenses. Landlords can track expenses using:
- Accounting software: Platforms like Xero, QuickBooks, or FreeAgent streamline expense management and reporting.
- Manual records: Maintaining spreadsheets with detailed receipts and invoices.
- Bank account separation: Using a dedicated account for property income and expenses simplifies audit trails.
Accurate tracking ensures landlords can claim all eligible expenses, reducing taxable profit while remaining compliant with Section 24 tax regulations.
Incorporation Into Limited Companies to Mitigate Landlord Tax
For many landlords affected by Section 24 tax, incorporating their buy-to-let properties into a limited company—often referred to as a transfer ownership strategy—is a viable way to mitigate tax liabilities. This approach has become increasingly popular as it offers potential savings on higher-rate tax and provides additional flexibility in property management. Transferring property ownership to a limited company allows landlords to deduct mortgage interest as a business expense, which is not permitted for individual landlords under Section 24. Additionally, some unused tax deductions or finance costs may be carried forward to future tax years in certain circumstances. The introduction of Section 24 has led many landlords to reassess their tax positions and consider restructuring their property holdings.
Why Incorporation Can Help
Operating through a limited company can reduce the tax impact of Section 24 tax for higher-rate landlords. The key benefits include:
- Corporation tax rate advantage: Rental profits within a limited company are subject to corporation tax (currently 19%), often lower than the 40% or 45% income tax paid by higher-rate landlords.
- Full mortgage interest deductibility: Within a company structure, mortgage interest remains fully deductible against rental income, bypassing the restrictions imposed by Section 24 tax.
- Retained earnings flexibility: Profits can be retained in the company for reinvestment, reducing the immediate personal tax liability.
- Succession planning and portfolio management: Companies provide a structured framework for joint ownership, inheritance planning, and scaling property portfolios efficiently.
However, it is essential to note that incorporation comes with additional responsibilities, including filing annual accounts, corporation tax returns, and complying with Companies House requirements.
How to Transfer Property to Limited Companies
Transferring properties into a limited company involves careful planning and consideration of both legal and financial implications. The main steps include:
- Valuation of the property: Obtain an accurate market valuation to determine potential capital gains tax (CGT) and stamp duty land tax (SDLT) liabilities.
- Mortgage consent: Lenders must approve the transfer, and remortgaging may be required to transfer the mortgage into the company.
- Legal transfer: Engage a solicitor to prepare and execute the legal transfer of ownership.
- Tax planning: Consider CGT, SDLT, and other taxes triggered by the transfer, and explore reliefs that may be available.
- Company registration: Ensure the company is properly registered with Companies House and all accounts and tax returns are correctly filed.
Capital Gains Tax and Other Taxes on Restructuring
Transferring property to a limited company can trigger several tax considerations:
- Capital Gains Tax (CGT): Landlords may face CGT on the increase in property value since acquisition. CGT rates depend on personal income tax bands.
- Stamp Duty Land Tax (SDLT): SDLT may apply when transferring property to a company, particularly if there is an outstanding mortgage.
- Available reliefs: Rollover relief or gift relief can sometimes be used to reduce CGT liability, but professional guidance is essential.
By carefully planning the transfer and leveraging available reliefs, landlords can minimise the financial impact of Section 24 tax while restructuring their portfolios for long-term efficiency.
Special Ownership Scenarios: Civil Partners and Couples
Section 24 tax not only affects individual landlords but also has implications for property ownership structures involving spouses or civil partners. Allocating rental income to a lower income partner can be an effective tax planning strategy, as it may reduce the overall tax liability on rental income. Understanding the rules for transfers and income allocation is essential to avoid unexpected tax liabilities.
It is also important to note that landlords with larger portfolios are generally less affected by Section 24 compared to those with one or two properties, as smaller landlords are more likely to be pushed into higher tax brackets.
Transfers Between Spouses
Transfers of buy-to-let properties between spouses are generally exempt from capital gains tax (CGT) and stamp duty land tax (SDLT), provided the transfer is made at no gain/no loss. This allows couples to:
- Optimise tax bands: By redistributing rental income, couples can make the most of each partner’s personal allowance and basic rate tax band.
- Reduce Section 24 tax impact: Careful allocation of rental profits may mitigate some of the higher-rate tax exposure caused by Section 24 tax.
However, it is crucial to note that any attempt to artificially shift income purely to reduce tax can attract HMRC scrutiny. All transfers should have genuine commercial or personal rationale.
Transfers Involving a Civil Partner
Civil partners enjoy similar tax treatment to married couples under UK law. Transfers between civil partners are exempt from CGT and SDLT in most circumstances, allowing:
- Income splitting to maximise basic rate bands
- Strategic planning for succession or portfolio restructuring
- Reduced impact of Section 24 tax on combined rental income
Again, professional advice is recommended to ensure transfers comply with HMRC requirements and avoid unintentional tax liabilities.
Warning About Income Tax Band Shifting Risks
While splitting rental income between spouses or civil partners can provide relief, there are risks:
- HMRC may challenge arrangements designed purely to avoid higher-rate tax
- Section 24 tax still applies, so planning must consider the 20% basic rate credit and remaining liabilities
- Proper documentation and genuine ownership changes are critical for compliance
Landlords in special ownership scenarios should evaluate their rental portfolio carefully and seek guidance from experienced accountants, such as The Taxcom team, to optimise tax outcomes and ensure full compliance with Section 24 tax rules.
When to Seek Professional Advice on Landlord Tax
Section 24 tax has added complexity to UK buy-to-let taxation, making professional guidance highly beneficial. It is important to note that section 24 landlord tax does not apply to commercial properties or furnished holiday lets (FHLs), so landlords in these categories are not affected by the restrictions. While some landlords may manage basic filings independently, many situations require expert input to optimise tax efficiency and remain compliant with HMRC regulations.
Situations Where Professional Advice Is Crucial
- High-value property portfolios: Landlords with multiple properties may face substantial tax liabilities under Section 24 tax. Professional advice can identify strategies to reduce overall exposure.
- Incorporation or restructuring: Transferring properties into a limited company or between partners involves CGT, SDLT, and complex legal requirements. Mistakes can be costly.
- Complex ownership scenarios: Couples, civil partners, or joint ventures may require expert guidance to optimise income allocation and prevent unintended tax consequences.
- Changes in tax legislation: Section 24 tax is part of a broader regulatory framework. Professional accountants stay updated on new HMRC guidance, reliefs, and thresholds.
Engaging a professional adviser can help landlords maximise tax efficiency by identifying allowable expenses, reliefs, and mitigation strategies that may otherwise be overlooked. It also reduces the risk of errors and penalties, as HMRC fines for incorrect filings can be significant, and expert oversight ensures compliance.
Take Control of Your Landlord Tax with Expert Guidance
Navigating Section 24 tax and its impact on buy-to-let properties can be challenging, particularly for higher-rate taxpayers or those managing multiple properties. At The Taxcom, we specialise in providing tailored tax advice for landlords across the UK—including guidance on property rental income tax.
Whether you need help claiming allowable expenses, planning property transfers, or exploring incorporation into a limited company, our experienced team ensures your tax strategy is efficient, compliant, and aligned with your financial goals.
Don’t leave your rental income to chance. Contact The Taxcom today to protect your profits and simplify your landlord tax planning.