Do you know what is Section 24? If you are a UK landlord with a buy-to-let mortgage, understanding Section 24 is a must. In simple terms, Section 24 refers to a tax rule in the United Kingdom that has changed how individual landlords can claim tax relief on mortgage interest. Along with that, they can also claim other residential property finance costs. Landlords typically receive relief in the form of a basic-rate tax reduction, rather than deducting those costs directly from rental income.
This guide clearly explains what is Section 24, why it was introduced, and what landlords should understand before making decisions about property ownership or limited company structures.
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What is Section 24 in the UK?
Before diving into how Section 24 works, the first step is to understand what is section 24. Section 24 of the Finance (No. 2) Act 2015 restricts individual landlords from deducting finance costs (such as mortgage interest) from rental income when determining taxable profit. Landlords calculate taxable rental profits without deducting most finance costs, then claim a basic-rate tax reduction.
Example of Section 24
Let’s understand what is Section 24 with a real-life example:
Sarah receives £18,000 in rental income.
Her allowable expenses (excluding mortgage interest) are £3,000.
Mortgage interest is £7,000.
Under Section 24
Taxable rental profit = £15,000
She then receives a 20% tax reduction based on the £7,000 finance costs.
How Does Section 24 Work?
To understand what is section 24, it is important to know how it changes the relief from mortgage interest for landlords.
Before Section 24 Applied to Landlords
Before Section 24, individual landlords could deduct 100% of mortgage interest from rental income before computing their taxable profit.
And After Section 24 Applies to Landlords
However, under Section 24, mortgage interest is no longer deducted in the same way. Instead, landlords determine their rental profit before deducting most of their financing costs. They subsequently claim a basic-rate tax reduction on qualifying mortgage interest and finance costs.
Moreover, it means that mortgage interest and similar charges are no longer deductible from your taxable income. However, other allowable expenses, such as maintenance, insurance, and leasing agent fees, can still be deducted in the same way.
Who Does Section 24 Affect?
When it comes to understanding what is section 24, it is important to know who it affects. Section 24 does not affect everyone equally. Knowing whether it applies to you is the first step in determining your next move. Look below to see whether the new Section 24 ruling applies to you.
When Section 24 Applies
- Individual landowners who possess rental properties under their own names
- UK residents who derive their income from the rental of residential property
- Landlords using mortgages or loans to finance their properties
When Section 24 Does Not Apply
- Limited companies can still deduct mortgage interest as a business expense.
- Commercial property owners
What is The Purpose Of Section 24?
To learn what is Section 24 it is important to understand why this rule was introduced. The primary purpose of “Section 24” is to refer to UK tax legislation that restricts individual landlords from deducting mortgage interest from their rental income. The Government introduced Section 24 to reduce the tax advantages available to individual landlords and, according to its stated policy objectives, improve fairness within the housing market.
What is The Tax Rule For Section 24?
A clear answer to what is Section 24 starts with how the rule treats mortgage interest and other finance costs for tax purposes. Individual landowners can no longer deduct most finance costs, such as mortgage interest, from rental income before determining their taxable profit under Section 24. In addition, they receive a 20% reduction in basic-rate tax on qualifying finance costs. It means that Mortgage interest may still reduce the ultimate tax bill; however, it does not affect taxable rental profit in the same way as a normal expense.
How Has Section 24 Affected Landlords?
Landlords often ask about what is Section 24 when they observe that mortgage interest no longer reduces taxable rental profit. Moreover, Section 24 has increased operating costs for landlords with buy-to-let mortgage(s). Key impacts are:
- Even when actual cash flow is lower, the taxable rental profit increases.
- Reduced post-tax income from buy-to-let properties.
- Landlords are under increased pressure to review their mortgage arrangements, costs, and rent.
- Higher tax bill, particularly for taxpayers who pay at the higher rate or additional rate.
- Less cash is available for portfolio growth, property maintenance, or reinvestment.
What is The Section 24 Tax Loophole?
When exploring what is Section 24, many landlords ask whether there is a Section 24 tax loophole that could legally reduce the rule’s impact. Section 24 is a component of the Finance Act 2015 and is not a tax loophole itself. Furthermore, legislation has effectively restricted individual UK landlords from deducting 100% of their mortgage interest from their rental income before paying tax, thereby closing a previous tax break.
How Landlords Manage And Reduce Section 24?
To better understand what is section 24, the most important aspect is to know how landlords manage Section 24. Landlords who choose not to sell to or establish a company often use fully compliant strategies to mitigate their tax obligations:
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Spousal Asset Transfer
When one spouse or civil partner pays a lower rate of income tax, landlords frequently use a Deed of Trust to transfer beneficial ownership of the rental income to that spouse or civil partner.
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Transferring Ownership
Transferring property into a limited company can trigger Capital Gains Tax and Stamp Duty Land Tax, although relief may be available in limited circumstances. Professional advice is essential before proceeding.
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Incorporation
Transferring properties from personal names to a limited company. Mortgage interest remains a completely deductible business expense for companies, thereby avoiding the restriction on individual tax credits.
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Review Your Operating Costs
Reducing property operating costs is the most efficient way to recover funds lost due to high taxes. For example, you may choose to manage the property yourself rather than hiring a management company.
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Review Your Mortgage
By reviewing your total mortgage expenses and securing a more competitive loan, you can mitigate the effects of Section 24.
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Move Toward a Commercial Portfolio
Converting your investments to commercial property allows you to avoid the ruling, as Section 24 is exclusively applicable to residential property.
Can Limited Companies Help With Section 24?
After understanding what is section 24, next step is to know whether using a limited company can reduce the impact of the rule. Mortgage interest relief is restricted for individual landlords under Section 24. However, it is usually not applied in the same way to properties held through a UK limited company.
A limited company normally deducts mortgage interest as a business finance expense before calculating Corporation Tax. Some people describe limited company ownership as a way to reduce the impact of Section 24. However, this is not a loophole. It involves operating under a different tax regime.
However, it is not a straightforward loophole for all landlords. The transfer of property into a limited company may require additional administrative tasks, legal fees, refinancing costs, Stamp Duty Land Tax, and Capital Gains Tax.
Get Expert Support With Section 24
If you are still uncertain about what is section 24 and how it affects your rental property, we are here to help you. At LimitedCompanyAccountants, our accountants can help review your allowable expenses, calculate the tax impact, and clarify how the rule applies to your buy-to-let income. We also guide you on whether your current ownership structure remains appropriate.
Before making your next property decision, contact our LimitedCompanyAccountants today for practical Section 24 advice.
Whether you’re just forming your company or already knee-deep in paperwork, our London-based accountants are ready to jump in. One quick call and we’ll figure out what you actually need.
The Bottom Line
Understanding what is section 24 is beneficial for UK landlords, as it helps them understand the impact of mortgage interest relief on their rental profits and tax liabilities. The rule may have a more significant effect on landlords who have buy-to-let mortgages, particularly those who are higher-rate taxpayers.
Limited company ownership may prove advantageous in certain circumstances; however, it is not suitable for all people. Always contact a professional tax advisor and review your position before making any changes.
Disclaimer: All the information provided in this article is general in nature; it does not intend to disregard any of the professional advice.
