What impact does Section 24 of the Finance Act 2015 have on Landlord’s
If you’re a landlord in the UK, you’ve probably heard about Section 24 of the Finance Act 2015, commonly known as the “tenant tax.” If you haven’t, I’m here to assist in informing you about it. This new tax affects landlords by creating restrictions on how they can deduct finance costs from their rental income (which is the income from the tenant given to the landlord). In this blog, we will explain what Section 24 is and how it works with given scenarios. Additionally, we will explore ways landlords can manage the new tax rules.
Section 24
As mentioned before, section 24 prevents landlords from deducting most finance costs, such as mortgage interest and arrangement fees, from their rental income just before calculating how much tax they need to pay. So, what this means for the landlord is that the landlord has to pay tax on their rental income without taking the finance costs into account.
This is an issue for landlords as this means that landlords are seen as making profit when in cash terms they are making less or even a loss. This therefore causes many landlords to be in a higher tax bracket (which means they will have to pay more tax). So, as a knock-on effect, this has led to rising rents for tenants.
Even though Section 24 was made law in 2015 in the Finance Act, it was actually not enforced until the beginning of 2017. So, before 2017, landlords could legally deduct their full finance costs from their rental income. However, they wouldn’t be able to do that now. This is because, under Section 24, they must calculate their taxable income without these deductions.
I’m going to be giving a scenario and how Section 24 would cause the landlord to pay higher tax. Henna, who is a landlord, earns £55,000 from her job and £30,000 from her rental property. She pays £15,000 in mortgage interest and £2,500 in maintenance each year.
Before Section 24:
Rental profit: £30,000 (rent) – £15,000 (mortgage interest) – £2,500 (maintenance) = £12,500
Total taxable income: £55,000 (salary) + £12,500 (rental profit) = £67,500
Tax Calculation Before Section 24:
Personal Allowance (0% Tax on £12,570)
Basic Rate (20% Tax on £37,700): £37,700 × 20% = £7,540
Higher Rate (40% Tax on £17,230): £17,230 × 40% = £6,892
Total Tax Payable: Basic Rate Tax: £7,540 Higher Rate Tax: £6,892 Total tax payable: £14,432
After Section 24:
Rental profit: £30,000 (rent) – £2,500 (maintenance) = £27,500
Total taxable income: £55,000 (salary) + £27,500 (rental profits) = £82,500
£12,570 @ 0% (Personal Allowance): £0
£37,700 @ 20% (Basic Rate): £37,700 × 20% = £7,540
£32,230 @ 40% (Higher Rate): £32,230 × 40% = £12,892
Total Tax Before Section 24 Relief: £7,540 + £12,892 = £20,432
You then get to apply finance cost relief at 20% only.
Apply Section 24 Relief: Mortgage Interest: £15,000 Tax Credit (20% of Mortgage Interest): £15,000 × 20% = £3,000 Total Tax Payable After Section 24 Relief: £20,432 – £3,000 = £17,432
So Henna’s tax liability increases by £3,000 under Section 24 despite no change in her income
Strategies to Mitigate Section 24
There are 3 different ways that you can help bring down your tax.
Partner route
One way you can mitigate Section 24 is by transferring your property to a lower-income partner. This is because HMRC allows income to be shared between a couple. However, make sure that your marriage/civil partnership is acknowledged by HMRC. Transferring your property to a lower-income partner can reduce tax liability. If you are thinking of considering this route, make sure to get professional advice.
Limited company route
Section 24 of the Finance Act 2015 exempts landlords who transfer their property to a limited company. However, this option involves many costs and is a complex procedure. For instance, there are potentially capital gains tax implications, higher mortgage rates, and stamp duty to consider. Therefore, this route should generally be taken only if the landlord has a substantial portfolio to make it cost effective. Always seek professional tax advice if you are considering this option.
Holiday Let Route
The Holiday Let Route is the final route to avoid Section 24. Instead of traditional long-term rentals, you can list your property as a holiday let. This means the property will be rented out to individual guests for short periods. This is because holiday letting is seen as a trading business by HMRC and what this means is that HMRC allows full deduction of finance costs. However, holiday lets require more management so a person who does not have much time may struggle with the house letting. Landlords must meet specific letting criteria for the property too to qualify as a holiday let.
Future HMRC plans
Starting in April 2025, HMRC has announced in the 2024 Budget they will enforce changes to tax relief for Furnished Holiday Lettings (FHLs). The Relief will shift to a 20% tax credit, which means higher-rate taxpayers will pay more tax through this new law. Landlords should carefully consider this change when planning their property strategies.
Conclusion
To summarise everything section 24 has increased the tax burden for landlords, especially those landlords with a limited number of rental properties, as it can be more costly for them. Although there are strategies to reduce Section 24 impact, each comes with its own complexities and risks. Therefore, seeking professional advice is super important. Tax Professionals can help navigate these changes and make informed decisions, leading to better outcomes.
