There is a buzz about mortgage interest relief in the UK property market. For those who own property with no mortgage, this change will not make a difference to the way they manage their rentals. Landlords with mortgages to pay whose properties are in personal names, as opposed to a limited company, will likely see a significant rise in their tax bill, with those in the 40 percent plus tax bracket likely to be most affected.

Section 24 was introduced in April 2017 and was planned to phase over four years up to April 2021. What Section 24 effectively did was ban Landlords from claiming mortgage interest, or any other property finance, as tax-deductible against their rental income. Rental profits were taxed at 20 percent, which was the maximum deduction for finance costs, now for landlords who hold the property in their own name the tax is at 40 percent and interest costs cannot be deducted.

Section 24, also known as the Tenant Tax, was challenged legally. This tax is another one of the pressures on the UK cost of living because of its devastating consequences for landlords, particularly accidental landlords perhaps where after two households got together and rented out one of the former homes, previously the rent collected would have covered their mortgage, now they are forced sellers. The time for this tax to hit in full could not be worse with the added recessionary pressures of the fuel crisis and covid aftermath!

Many landlords are forced to raise rents, sell their properties and even evict tenants to pay this tax. Renters who have enough to contend with also have to deal with the scary situation of soaring rents.

Who is Affected?

Landlords (save for those whose property portfolios are held in a Limited company) who have loan or mortgage interest on their to-let properties are the affected parties. They have to pay taxes on costs and profits. As Limited companies are exempt from Section 24, one way to beat the system is to move the buy-to-let property portfolio into a limited company. However, this has repercussions in other areas, in particular, Stamp Duty Land Tax and Capital Gains tax – as moving a property from a personal name to a Limited company is a chargeable transfer so stamp duty and capital gains tax becoming payable. In addition, the buy-to-let landlord may also be hit with early repayment charges from their mortgage lender.

Is There Any Way The Effects Can Be Mitigated?

A few options are available, including transferring property ownership to a spouse or partner with a lower tax threshold. Affected landlords can also consider setting up a company to own their properties and analyze accounts where costs can be reduced.

A Quick history recap on Section 24 Tax Deductible Costs for Landlords

Stage One (April 2017)

In Stage One of the Section 24 Act, higher-rate tax relief was allowed to be claimed on 75 percent of mortgage interest costs. The balance amount attracted a basic rate of tax relief.

Stage Two (April 2018)

In this stage, the tax relief claimed dropped to 50 percent of the mortgage interest costs.

Stage Three (April 2019)

In this stage, higher-rate tax relief was applied to 25 percent of the mortgage interest costs.

Stage Four (April 2021)

This stage was completed in 2021. Landlords were allowed to claim tax relief at the basic rate level of 20 percent.

Landlords who have not done anything about the situation can still explore options for reducing costs and increasing their revenue.

Options include setting up a company to buy the property they have or transferring it to a limited company if they own property as an individual. However, this can create the issue of paying capital gains tax on the difference between the original purchase price and its current value. They will also have to pay stamp duty.

Landlords can also consider transferring more rent to them to limit their overall tax bill. However, such a move can affect capital gains tax and inheritance tax.

Higher tax translates into lower profits for landlords. That’s why there is a growing fear that an underlying cause of rising rents which are adding to the cost of living crisis is taxing landlords. To justify the increase, landlords must look at cost-effective, tax-deductible property improvements – but that opens another whole debate about the cost of taking the UK letting stock up to EPC grade C by next year.