Section 24 of the UK Finance (No.2) Act 2015, commonly referred to as the “Tenant Tax,” has had a significant impact on the buy-to-let market since its introduction. The legislation restricts the amount of tax relief that landlords can claim on their mortgage interest payments, which has resulted in increased tax bills for many landlords. In this article, we will explore the section 24 rules in detail and their impact on UK property tax. We offer clients deal sourcing services here in Aventine property.
What is Section 24?
Section 24 of the UK Finance (No.2) Act 2015 was introduced by the government as a measure to restrict the amount of tax relief that landlords can claim on their mortgage interest payments. The legislation was introduced in phases, with the changes starting to take effect from April 2017 and being fully implemented by April 2020.
Under the previous system, landlords could deduct their mortgage interest payments from their rental income before calculating their taxable profit. This meant that landlords could offset the cost of their mortgage interest against their rental income, which reduced their overall tax liability. However, under the new rules, landlords can no longer deduct their mortgage interest payments from their rental income to calculate their taxable profit.
Instead, landlords can only claim a basic rate tax reduction on their mortgage interest payments. This means that landlords will pay tax on their full rental income, and then receive a tax credit at the basic rate of tax (currently 20%) on their mortgage interest payments. The changes have been phased in gradually, with landlords only able to claim a basic rate tax reduction on 25% of their mortgage interest payments in 2017/18, increasing to 50% in 2018/19, 75% in 2019/20, and finally 100% in 2020/21.
The Impact of Section 24 on UK Property Tax
The impact of Section 24 has been significant, particularly for landlords who have high levels of borrowing or who operate in areas with low rental yields. Many landlords have seen their tax bills increase as a result of the changes, and some have had to sell properties to reduce their exposure to the new rules.
The changes have had the greatest impact on higher-rate taxpayers, who were previously able to offset their mortgage interest payments against their rental income at their marginal tax rate (up to 45%). Under the new rules, these landlords can only claim a basic rate tax reduction (20%) on their mortgage interest payments, resulting in a significant increase in their tax bill.
The changes have also had an impact on the affordability of buy-to-let properties. As landlords are no longer able to offset as much of their mortgage interest payments against their rental income, some have found that their properties are no longer profitable or have reduced in profitability. This has resulted in some landlords selling their properties, which has put downward pressure on property prices in some areas.
Is There Any Relief Available?
Landlords who operate in a limited company structure are not affected by the section 24 rules. This is because the legislation only applies to individual landlords, and not to companies.
Another option available to landlords is to switch to a repayment mortgage. This is because the changes only affect mortgage interest payments and not capital repayments. Landlords who switch to a repayment mortgage will gradually reduce their mortgage balance and reduce their exposure to the section 24 rules. Read more here about Section 24.
Finally, landlords can also look to reduce their overall tax bill by making use of other available tax reliefs. For example, landlords can claim tax relief on their property repairs, maintenance, and management costs. They can also claim capital allowances on certain items of equipment, such as boilers and white goods, and offset their rental income against any allowable expenses.