Section 24 of the Finance (No. 2) Act 2015 has been one of the most significant tax changes for UK landlords in recent years. Often referred to as the landlord tax, it has changed how buy-to-let investors work out their profits, pay their taxes and plan their property portfolios.
If you’re a landlord or considering investing in rental property, you need to get your head around Section 24 and what it means for you. This makes sure you avoid unexpected tax bills and you’re in the best position to make smarter strategies for managing your investments.
In this article, we’ll cover how:
- Section 24 has hit landlords hard by changing how tax relief on mortgage interest is handled.
- Post-2020, landlords face increased tax liabilities as rental income is taxed in full, receiving only a 20% tax credit on finance costs, impacting higher- and additional-rate taxpayers the most.
- The introduction of Section 24 aims to balance the housing market, initially to slow down the buy-to-let surge and make homeownership easier for first-time buyers.
- Landlords downsizing their portfolio can sell their property quickly with Zapperty.
What Is Section 24?
Section 24 limits how landlords can claim tax relief on mortgage interest and other finance costs. Here’s what happened before and after Section 24 was introduced and came into effect in 2020:
- Before 2017: Landlords could deduct 100% of their mortgage interest from rental income before working out taxable profit.
- After Section 24 (from April 2020 onwards): Rental income is taxed in full, and instead of deducting interest, landlords receive a 20% tax credit on their finance costs.
This means basic-rate taxpayers usually see little change, but higher- and additional-rate taxpayers face much higher bills, as more of their rental income is now subject to tax.
Why Was Section 24 Introduced?
The government brought in Section 24 primarily to slow down the buy-to-let boom in the mid-2010s. At the time, property investment was becoming increasingly attractive to landlords, but this surge in demand made it more difficult for first-time buyers to get onto the property ladder. Another motivation was to ‘level the playing field’ between landlords and owner-occupiers. Unlike landlords, people buying a home to live in can’t deduct mortgage interest from their taxable income, so Section 24 was designed to reduce the tax advantages that landlords had previously enjoyed.
The policy remains controversial, as you might expect. Many landlords argue that it has made rental portfolios far less profitable, which in turn has reduced the supply of available homes and pushed up rents for tenants across the UK.
How It Works: Before vs After
Here’s a simplified example to show the difference:
Example:
- Rental income: £15,000
- Mortgage interest: £5,000
Before Section 24 (pre-2017):
- Taxable profit = £10,000 (£15,000 – £5,000)
- Higher-rate taxpayer at 40% = £4,000 tax due
After Section 24 (fully implemented):
- Taxable profit = £15,000 (interest ignored)
- Higher-rate taxpayer at 40% = £6,000 tax due
- 20% tax credit on £5,000 interest = £1,000
- Final bill = £5,000
Result: The landlord pays £1,000 more tax each year compared with the old rules.
Impact on Landlords
Section 24 has had some fairly major consequences for landlords across the UK. One of the most immediate effects has been the rise in tax bills, especially for those in the 40% and 45% tax brackets, where the loss of full mortgage interest relief has stung the most. As a result, many landlords have seen their profits drop, especially those with higher levels of borrowing.
To offset these losses, some landlords have chosen to raise rents, passing part of the additional cost onto tenants. This is only natural, of course, but has meant some tenants have been forced to pay more or, unfortunately, move home. Other landlords have decided that the effort and cost are no longer worth it, leading them to sell properties or even move away from the buy-to-let market altogether. As a result, this has reduced the overall availability of rental housing in some regions, which has put even more pressure on tenants and the rental sector as a whole.
Key Strategies to Mitigate the Impact
While you can’t avoid Section 24, some landlords use certain strategies to reduce its effects, including:
- Transferring ownership: Moving property (or a share) to a spouse/partner in a lower tax bracket.
- Incorporation: Holding properties in a limited company. Companies can still deduct mortgage interest in full, and corporation tax is lower than higher-rate personal tax.
- Switching investment types: Commercial properties and certain holiday lets are not affected by Section 24.
- Reviewing financing: Reducing leverage or switching to lower-interest products.
It’s important to seek professional tax advice before restructuring your portfolio.
Phased Roll-Out of Section 24
Section 24 was phased in over four years to ensure it didn’t hit landlords with too much in a short timeframe:
- 2017/18: 25% of mortgage interest restricted
- 2018/19: 50% restricted
- 2019/20: 75% restricted
- 2020/21 onwards: 100% restricted, fully in place
This gradual approach gave landlords time to adapt, though many are still adjusting strategies even today.
Are You a Landlord Considering Selling Up?
Section 24 led to huge changes for landlords in the UK. What was once a highly tax-efficient investment has become way more challenging, especially for those with large mortgages.
Key takeaways:
- The effects of Section 24 include higher tax bills for landlords, reduced profits, increased rents for tenants and some landlords exiting the buy-to-let market.
- Strategies like transferring ownership, incorporating properties and reviewing financing can help landlords mitigate Section 24’s impacts.
- As landlords adjust to these changes, professional tax advice and strategic planning are crucial to manage portfolios effectively under the new regulations.
If you’re struggling with profitability or considering selling a property, you don’t need to navigate this alone. At Zapperty, we help landlords explore their options, including selling quickly for cash. Learn how Zapperty works and get a fast cash offer today so you can move forward with confidence.
