Effect of Section 24 on Buy-to-Let Landlord Taxes

Buy-to-let (BTL) property investments have long been a popular choice with many UK investors, potentially offering steady rental income and long-term capital appreciation. However, the landscape for BTL landlords has shifted since the introduction of Section 24 of the Finance (No. 2) Act 2015 (“Section 24”), which restricted tax relief for interest payments on BTL mortgages in a phased manner over four years starting in the tax year 2017-18. Fast forward to 2024 and BTL landlords are still faced with the financial pressures created by Section 24 and other tax changes which may impact their BTL investment returns adversely.

How does Section 24 work?

Before Section 24 came into effect, landlords could deduct 100% of their BTL mortgage interest payments from their rental income for tax purposes.  

However, after Section 24 came into effect, BTL mortgage interest tax relief was restricted to 75% of mortgage interest in tax year 2017-18, 50% of mortgage interest in 2018-19, 25% of mortgage interest in 2019-20 and only 20% of mortgage interest from 2020-21 onwards.  

Moreover, the restricted relief on mortgage interest was provided at only the basic income tax rate of 20%, even if the landlord was a higher rate income tax payer at 40% or additional rate income tax payer at 45%.  

The rationale behind Section 24 was to level the playing field between owner occupiers of residential properties and BTL investors so far as the tax system was concerned, as BTL investors, particularly those with higher incomes, were perceived to be benefiting unfairly from mortgage interest tax relief, which owner occupiers with mortgages had ceased to enjoy nearly twenty years earlier.

Other BTL Landlord Tax Changes

While Section 24 continues to influence the tax landscape for BTL landlords, 2024 also brings further changes that BTL landlords must navigate. These include:

1. Capital Gains Tax (CGT): The CGT allowance was reduced from £6,000 to £3,000 from 6 April 2024 onwards, thus effectively imposing an additional CGT liability on BTL landlords if they make a taxable capital gain when they sell their BTL property. The CGT allowance had also already been reduced significantly from £12,300 to £6,000 during the previous tax year. This means that a progressively greater proportion of capital gain has effectively become liable for CGT.  

Additionally, while the CGT rates on BTL property for basic and higher rate taxpayers are 18% and 24%, respectively, at present, there is widespread speculation that the new government that was elected earlier this year is likely to increase CGT rates significantly when it presents its first budget in October 2024, possibly even aligning these with higher income tax rates.

2. Income Tax Rates: The current basic income tax rate is 20% on taxable income from £12,571 to £50,270, higher income tax rate is 40% on taxable income from £50,271 to £125,140 and additional income tax rate is 45% on taxable income over £125,140. The tax free personal allowance for income tax purposes has remained frozen at £12,570 since 2021-22 and will continue to remain frozen at this level until 2028. This means that a progressively greater proportion of income has effectively become liable for income tax. Moreover, the personal allowance goes down by £1 for every £2 of income above £100,000 and, depending on income, can go down to zero.

3. Stamp Duty Land Tax (SDLT): While the 3% SDLT surcharge on the purchase of properties additional to your primary residence remains, a significant change effective from 1 June 2024 is the abolition of Multiple Dwellings Relief. This means BTL landlords who purchase more than one BTL property in one transaction will no longer benefit from stamp duty calculations based on the average price of the properties, rather than their aggregate price.

The effects of Section 24 and other landlord tax changes

Today, BTL mortgage interest cost relief is restricted to only 20% of such costs and that, too, at only the 20% basic rate of income tax. This restriction of mortgage interest relief has hit BTL landlords hard particularly as mortgage interest rates have risen dramatically since mid-December 2021, in line with the increases in the Bank of England’s base rate to combat high inflation rates. BTL landlords who are taxed at higher or additional income tax rates have been hit harder still.  

Higher mortgage costs, combined with the inability to offset interest payments fully, have also pushed some landlords into higher income tax bands. Many landlords have had to endure significant negative cashflows on their BTL investments and some have even been forced to consider selling their BTL properties at distressed prices into a weak property market in order to avoid the risk of mortgage default and repossession.

Potential Strategy to Mitigate the Impact

A potential strategy to manage the impact of Section 24 is to transfer BTL properties that are owned on a personal basis into limited companies owned by the BTL landlords.  

Companies are not subject to the mortgage interest tax relief restriction under Section 24 and can, therefore, deduct 100% of interest from rental income for the purposes of determining taxable profit. On the other hand, interest rates on debt raised by BTL companies can be higher than BTL mortgage interest rates on personally owned BTL properties, thus potentially diluting some of the benefit of the full interest cost tax relief available to companies.

In any event, transferring a BTL property from personal to company ownership requires the company to have sufficient capital to be able to purchase the property at a fair market price. Depending on this price, the company might become liable for SDLT on the purchase and the landlord might become liable for CGT on the sale.​

Thus, transferring BTL property from personal to company ownership is not straightforward and it may be worth consulting a financial advisor or solicitor before deciding on the optimal course of action. Even if a transfer is not the optimal solution for a BTL property that you already own, it may be worth considering making future BTL investments through a company you own.

FAQs

Q.  What is Section 24 and how does it affect landlords?

A. Section 24 of Finance (No. 2) Act 2015 (“Section 24”) restricted tax relief for interest payments on BTL mortgages in a phased manner over four years starting in tax year 2017-18.  

BTL mortgage interest tax relief was restricted to 75% of mortgage interest in tax year 2017-18, 50% of mortgage interest in 2018-19, 25% of mortgage interest in 2019-20 and only 20% of mortgage interest from 2020-21 onwards.  

Moreover, the restricted relief on mortgage interest was provided at only the basic income tax rate of 20%, even if the landlord was a higher rate income tax payer at 40% or additional rate income tax payer at 45%.  

Q.  Can landlords avoid Section 24 by using a limited company?

A. A potential strategy to manage the impact of Section 24 is to transfer BTL properties that are owned on a personal basis into limited companies owned by the BTL landlords.  

Companies are not subject to the mortgage interest tax relief restriction under Section 24 and can, therefore, deduct 100% of interest from rental income for the purposes of determining taxable profit.

However, transferring a BTL property from personal to company ownership requires the company to have sufficient capital to be able to purchase the property at a fair market price. Depending on this price, the company might become liable for stamp duty on the purchase and the landlord might become liable for capital gains tax on the sale.

Q.  What are the Capital Gains Tax (CGT) changes for landlords in 2024?

A. The CGT allowance was reduced from £6,000 to £3,000 from 6 April 2024 onwards, thus effectively imposing an additional CGT liability on BTL landlords if they make a taxable capital gain when they sell their BTL property. The CGT allowance had also already been reduced significantly from £12,300 to £6,000 during the previous tax year. This means that a progressively greater proportion of capital gain has effectively become liable for CGT.  

Additionally, while the CGT rates on BTL property for basic and higher rate taxpayers are 18% and 24%, respectively, at present, there is widespread speculation that the new government that was elected earlier this year is likely to increase CGT rates significantly when it presents its first budget in October 2024, possibly even aligning these with higher income tax rates.

References:

Section 24 | Legislation.gov.uk | Published 2015