In 2015, then-Chancellor George Osborne announced sweeping tax reforms for landlords, known as Section 24 of the Finance (No. 2) Act 2015. These changes significantly reduced the tax relief available on mortgage interest for individual landlords, fundamentally altering the buy-to-let landscape.
The implementation of Section 24 has increased tax liabilities for many landlords, prompting a shift towards owning properties through limited companies. This guide explains what Section 24 is, how it impacts individual landlords, and the strategies landlords are using to adapt.
What Is Section 24?
How Section 24 Works
Before Section 24
- Rental Income: £20,000
- Mortgage Interest: £12,000
- Taxable Profit: £8,000
Tax for Higher-Rate Taxpayer (40%): £3,200
After Section 24
- Rental Income: £20,000
- Taxable Profit: £20,000 (Mortgage interest cannot be deducted)
- Tax for Higher-Rate Taxpayer (40%): £8,000
- 20% Tax Credit on £12,000 Mortgage Interest: £2,400
Final Tax Bill: £5,600
Impact: Higher-rate taxpayers see their tax liability increase significantly under Section 24, reducing net rental income.
Who Is Most Affected?
1. Higher-Rate and Additional-Rate Taxpayers
Landlords in the 40% and 45% tax brackets bear the brunt of Section 24 changes because their tax relief is capped at the basic rate of 20%.
2. Landlords with High Leverage
3. Portfolio Landlords
The Wider Impact on the Buy-to-Let Market
1. Reduced Profit Margins
Section 24 has squeezed profit margins for individual landlords, particularly those with high levels of borrowing.
2. Increased Rents
3. Shift to Limited Companies
4. Exits from the Market
Some landlords have sold properties or exited the market entirely, reducing rental stock and further driving up rents.
Strategies to Mitigate the Impact of Section 24
1. Incorporating a Limited Company
2. Paying Down Debt
3. Investing in Higher-Yield Properties
4. Partnering with a Lower-Rate Taxpayer
5. Consulting Tax Advisors
Case Studies
1: Higher-Rate Taxpayer Adopts a Limited Company
Scenario: A landlord with two properties, earning £50,000 annually, faces a £6,000 tax increase due to Section 24.
Solution: The landlord transfers the properties into a limited company, reducing tax liability and retaining profits within the company for reinvestment.
2: Paying Down Debt to Reduce Taxable Profits
Scenario: A landlord with a high mortgage balance on a single property finds their taxable profits doubled under Section 24.
Solution: The landlord pays off 50% of the mortgage balance, reducing taxable profits and easing the financial burden.
Pros and Cons of Owning Properties Through a Limited Company
Pros
- Tax Relief: Full mortgage interest deduction.
- Lower Tax Rates: Corporation tax (19%) is lower than higher-rate income tax (40%).
- Reinvestment Potential: Retain profits within the company for future purchases.
- Inheritance Planning: Use trusts to minimise inheritance tax liabilities.
Cons
- Setup Costs: Incorporation and legal fees.
- Ongoing Expenses: Accounting and administrative costs.
- Higher Mortgage Rates: Limited company mortgages often have higher interest rates.
FAQs
Ans: No, Section 24 applies to all individual landlords with financed properties. Switching to a limited company structure is the only way to bypass it.
Ans :Yes, limited companies can deduct 100% of mortgage interest from their profits.
Ans :This depends on your portfolio size, tax bracket, and long-term goals. Consult a tax advisor to assess the costs and benefits.
Ans :Yes, you may incur stamp duty and capital gains tax liabilities when transferring properties into a company.
Ans: Section 24 has reduced rental stock as some landlords exit the market, leading to higher rents for tenants.
