Section 24 & Property – All YOU Need to Know
By Helen Jackson
If you’re not familiar with Section 24 or you just want to brush up on your knowledge, this is the place to be. In this guide, we’re talking you through exactly what Section 24 is, how it works and its impact on the buy-to-let sector and how you can offset the financial impact it causes.
If you’re looking for more guidance on how to finance property development projects, check out our guide section. It’s packed full of useful information for property developers and mortgage brokers.
What is Section 24 and how does it work?
Section 24 is a change to the UK tax law and applies to the income landlords make from residential properties. This means buy-to-let landlords can’t claim as much tax as they could before, i.e. mortgage interest is no longer tax-deductible. Instead, landlords might find themselves paying more tax as their income might have shifted into the higher income bracket because they can’t claim as much back.
When and why was Section 24 introduced?
Announced in 2015 but introduced in April 2017, Section 24 came into full force in 2020 and was introduced for many reasons. Some reasons include stopping high-earning landlords from reclaiming a high tax rate, making the private rental market less appealing to landlords, and helping first-time buyers get their foot on the property ladder.
Who does Section 24 affect and how?
Section 24 affects all landlords (including accidental landlords) who are residents in the UK, regardless of where you own property and non-UK resident landlords with properties in the UK. If you’re in a partnership or part of a trust that owns residential properties, Section 24 will also affect you too. If you’re a limited company, however, you can still claim finance costs as allowable expenses.
How does it affect these people? Landlords will no longer be able to claim any property finance, i.e. mortgage interest, as tax-deductible. Previously, landlords could offset up to 75% of their finance costs (i.e. mortgage interest, loan interest, mortgage or loan repayment fees), but as of 2020, this has been replaced with a maximum tax credit of 20%.
If you own a holiday rental or commercial property, these changes do not apply to you.
What fees and taxes are impacted by Section 24?
Section 24 means you can no longer deduct finance costs, including mortgage interest, any interest on loans you’ve taken out for refurbishment purposes or repayment and arrangement fees on your mortgage or your loan. When you pay the income tax owed on all your earnings from property, you’ll only be able to claim 20% tax relief.
What impact has Section 24 had on the UK buy-to-let sector?
The biggest impact on the buy-to-let sector is that some landlords will end up paying higher income tax rates as they’re no longer able to offset finance costs as tax-deductible. This means because you’re claiming less back, landlords might find themselves in the higher earnings bracket, which means paying a high tax rate.
What do I need to do to ensure I am Section 24 compliant?
Make sure you’re working with an accountant who is informed about Section 24, preferably a contractor accountant, as it’s crucial you’re aware of the changes and how they affect your property business before year-end. Your accountant needs to be ahead of the curve when it comes to explaining these and any future changes that could impact your business.
Who can I speak to about Section 24 for legal/financial advice?
You’re best approaching your accountant, so together, you can figure out how you will be impacted by Section 24. This way, you can start planning how you can offset the additional costs in plenty of time.
Is there any way to offset the financial impact of Section 24?
You have a few options when it comes to offsetting any financial impact of Section 24.
Get out of the industry
This seems radical, but if you’re an accidental landlord or you were thinking about selling up and moving on anyway, this could be the time to do it. But keep in mind that it takes six months on average to sell a house, so it’s not going to be an immediate fix.
Increase your rent prices
By working out how much extra tax you have to shell out for at year-end, you can increase all your rental prices to cover it. Remember, increasing rent can be a sure-fire way to put tenants off. Approach the tenant as the end of their fixed-term gets closer and notify them of the increase. To justify the increase, you can consider carrying out renovation work on the property.
Sell your least profitable properties
Slim down your portfolio and keep only the most profitable ones; any properties that aren’t pulling their weight financially, you can look to sell soon.
Become incorporated
Limited companies can still claim property finance costs as allowable expenses. But make sure you do your research before taking the plunge, you will face more admin and more rigid taxation rules, and some of your accounts will be accessible in the public domain on Companies House.
What are the chances of Section 24 ending in the future?
It has been reversed in countries before, including in Ireland. Section 24 was introduced in Ireland in 2009 and incrementally reversed in 2017, where buy-to-let landlords can now claim 100% of the interest on residential mortgages. There is a lot of talk online about it potentially being reversed in the future, but there’s no guarantee it will be, so you should make plans as if Section 24 was staying in place for the foreseeable.
Final thoughts
It’s essential you understand how you’ll be affected by Section 24 and consider how you can offset financial implications, whether that’s by re-jigging your portfolio or making changes to the legal structure of your property business — don’t wait around to see how you’ll be affected.
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