Introduction: The Impact of Section 24 on Property Owners
If you’re a landlord holding properties in personal names, the changes brought about by Section 24 of the Finance Act 2015 are likely hitting your tax bills hard. Since April 2020, the UK government has implemented stricter rules that restrict mortgage interest relief for landlords holding residential properties in their personal names, with relief now capped at the basic rate of tax (20%).
For many landlords, this means higher tax liabilities as mortgage interest relief, once a valuable tool for managing taxable rental profits, is no longer fully deductible at higher tax rates. But here’s the good news: You don’t have to just accept the increased tax burden. With the right approach, you can navigate these changes without losing out on potential profits.
In this article, we’ll dive deep into how Section 24 affects landlords holding properties in personal names, explore tax-efficient strategies, and outline practical steps to mitigate the impact. If you want a clear strategy to manage your property taxes and plan ahead, contact us for a consultation — we’ll walk you through your options.
What Is Section 24?
In simple terms, Section 24 of the Finance Act 2015 limits the tax relief landlords can claim for mortgage interest and other finance costs associated with residential property. Before Section 24, landlords could deduct mortgage interest from their rental income, thereby reducing their taxable rental profits and lowering the amount of tax they needed to pay.
However, with Section 24, the relief landlords can claim on mortgage interest is restricted to the basic rate of income tax (20%). This applies regardless of whether you’re a basic-rate taxpayer or a higher-rate taxpayer.
This means that if you were previously benefiting from a 40% or 45% tax deduction on mortgage interest, you’re now only getting 20% relief, significantly increasing your tax burden.
Key Features of Section 24:
- Mortgage Interest Relief: Previously, landlords could deduct mortgage interest at their marginal tax rate (e.g., 40% or 45%). Now, it’s only available at 20%.
- Taxable Rental Profits: Since mortgage interest is now capped at the basic rate, landlords will see their taxable profits increase, leading to a higher tax bill.
Landlords in higher tax bands (40% or 45%) are hit hardest by Section 24, as they lose out on the full tax relief they were previously entitled to. This has led to increased pressure on landlords who already operate with tight profit margins.
If you’re unsure how these changes affect you, we offer a free consultation to help you assess your situation and optimise your property taxes.
How Section 24 Affects Property Owners in Personal Names
1. Increased Tax Liabilities
Let’s break down exactly how Section 24 impacts your tax bill. For landlords in higher tax bands, the key issue is that mortgage interest is no longer deductible at the higher rate. Instead, it’s limited to the basic rate of tax (20%).
- Rental Income: £10,000
- Mortgage Interest: £7,000
- Other Expenses: £2,000
- Taxable Profit Before Tax: £1,000 (after deducting mortgage interest)
Now, with Section 24, the mortgage interest is only deductible at the basic rate (20%):
- Taxable Profit: £8,000 before Mortgage interest deduction
- Tax Bill at 40%: £1,800 (with mortgage interest only deductible at 20%)
Previously, the landlord would have only paid £400 in taxes (based on £1,000 taxable profit). Now, they’re paying £1,800, which is a massive increase. This puts significant pressure on landlords who are already dealing with rising property costs.
The tax burden can be particularly straining for those with highly leveraged portfolios where mortgage payments are a significant portion of the rental income. If this sounds familiar, we can help you identify specific strategies to reduce your tax liabilities and increase profit margins.
2. The Cost and Complexity of Moving to a Limited Company
One of the most common strategies to avoid Section 24’s restrictions is to transfer properties into a limited company. This allows landlords to deduct mortgage interest from rental income at the company tax rate (usually 19%), rather than being limited to the basic rate of tax.
However, this strategy comes with its own set of challenges:
Challenges of Moving to a Limited Company:
- Capital Gains Tax (CGT): When transferring properties into a limited company, you will likely trigger CGT on any capital gains made since the properties were first purchased.
- Stamp Duty Land Tax (SDLT): The transfer of properties to a limited company is subject to SDLT at the higher residential rate (3% surcharge), which can add substantial costs.
- Refinancing: Once your properties are in a limited company, you may need to refinance them under the company’s name, which could involve higher interest rates and additional fees.
So, while transferring your portfolio to a limited company can offer relief from Section 24, the upfront costs and administrative burden can make it a less attractive option for many landlords.
But don’t worry, AccounTax Zone can help you evaluate whether this is the right path for you. Book a free consultation with us to get clear guidance on how to handle your property taxes efficiently.
How to Mitigate Section 24’s Impact
If transferring to a limited company isn’t a viable solution for you, there are still plenty of strategies that can help reduce your tax burden under Section 24.
1. Gradual Transfer to a Limited Company
Instead of transferring everything at once, you can consider gradual incorporation. By doing so, you spread the CGT and SDLT costs over several years, which makes the process more manageable and allows you to avoid large tax bills in a single year.
If you’re unsure where to start with gradual incorporation, we can help you design a step-by-step plan that reduces financial strain while ensuring tax efficiency.
2. Transfer Ownership to a Spouse or Civil Partner
If one spouse or civil partner is in a lower tax bracket, transferring part of your property portfolio to them can be a simple but effective way to reduce your overall tax burden. This allows you to split rental income and take advantage of lower tax bands.
This strategy is particularly useful when one partner is in a higher-rate tax band, and the other is in a basic-rate band. If you’re interested in learning more about income splitting, book a consultation with our team.
3. Maximise Available Tax Deductions
Be sure to make use of all available tax deductions to lower your taxable income:
- Pension Contributions: Contributing to your pension can help you reduce your taxable income.
- Gift Aid: Charitable donations also count as deductions from your taxable income.
If you’re unsure whether you’re using all available deductions, contact us for a tax review and we’ll make sure you’re not leaving any money on the table.
How to Transfer Properties Efficiently
If you decide that transferring your properties into a limited company is the best way forward, here’s how to do it in the most cost-efficient manner:
1. Seek Professional Tax Advice
Before taking any action, consult a property tax advisor to understand the CGT and SDLT implications of transferring properties. They can help you create a strategy that minimizes taxes and ensures smooth transfers.
2. Consult Mortgage Brokers Specializing in Property Portfolios
A mortgage broker can help you secure better refinancing rates, which can significantly lower your mortgage costs during the transition to a limited company. Consult a broker who specializes in buy-to-let properties to ensure the best possible deal.
3. Gradual Transfers and Tax Planning
Gradual transfers can be made more manageable if you have a clear tax-efficient strategy. Make sure to structure the transfers in a way that reduces the financial burden of CGT and SDLT. If you need help structuring the process, don’t hesitate to contact us.
FAQs related to Mortgage Interest Relief Restriction
Conclusion: Planning for the Future
Section 24 has certainly created challenges for landlords, but it doesn’t have to derail your property business. With careful planning and the right strategies, you can mitigate the impact of these changes and make your property portfolio more tax-efficient. Whether through gradual incorporation, income splitting, or maximizing available deductions, there are plenty of ways to manage your tax liabilities effectively.
If you’re feeling overwhelmed by these changes, it’s time to take action. Book a free consultation with us today, and we’ll walk you through your options. Whether you decide to transfer your properties or explore other strategies, we’ll ensure that your property tax planning is as efficient as possible.
