Your guide to section 24 and its tax relief implications for landlords
Section 24 of the Finance Act 2015 places restrictions on the tax relief that landlords can receive on their finance costs - yet a petition calls for this measure to be reversed.
A petition calling for the government to reinstate tax relief for landlords that allows mortgage interest to be set against rental income has gained more than 29,000 signatures. This petition addresses the changes that were made under section 24 of the Finance Act 2015, which restricts the tax relief that landlords can receive on their finance costs to the basic rate of income tax.
Why was section 24 introduced?
The purpose of section 24 is to ensure that landlords with higher incomes don't benefit from "the most generous tax treatment".
In the Summer Budget 2015, then-Chancellor, George Osborne, said: "Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income whereas homebuyers cannot, and the better off the landlord, the more tax relief they get."
What is section 24?
Back in 2016, landlords could deduct certain finance costs, such as payments on the mortgage or interest on loans funding furnishings for the property, from their rental profits before calculating the tax, something which was not available to homeowners.
Section 24 in the Finance Act 2015 was phased in over a five-year period between April 2017 to April 2020.
Under this new law, landlords can no longer deduct those additional costs from the income they earn on their properties before it's taxed.
What finance cost tax relief do landlords get in 2023?
Landlords instead can now get a tax-credit at the basic 20% rate on the lower amount from the following list:
- Finance costs, such as mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages or loans
- Property business profits
- Adjusted total income
Who does section 24 and its tax relief affect?
These tax relief rules apply to individual landlords operating in the private rented sector, including:
- UK-resident landlords letting in the UK or overseas
- Non-UK resident landlords letting in the UK
- Landlords letting a property through a partnership
Landlords that operate as a limited liability company operate under a different tax system, and can declare their rental income after deducting their mortgage costs.
The government estimated in its policy paper on this finance cost relief that only one in five individual landlords would receive less relief as a result of the new rules, with higher-earning landlords bearing the brunt of the change.
However, as landlords now pay tax on their gross rental income, this may potentially push some into a higher tax bracket.
What expenses are still deductible?
Certain expenses can still be deducted from your landlords' rental income - as long as they're "wholly and exclusively for the purposes of renting out the property."
That includes (among other allowable expenses):
- General maintenance and repairs to the property - but improvements don't count
- The water rates, council tax, gas, and electricity in the property
- Landlords’ insurance policies for buildings, or contents and public liability
- Costs of services, such as gardeners and cleaners
- Letting agent fees and management fees
How has the government responded to the petition asking for the full tax relief to be reinstated?
Those that have signed the petition highlight the effect that section 24 has on rental stock in the industry - and the predicted benefit if the full relief were reinstated.
“A survey of our landlord base found that 73% of those who have plans to exit the sector would refrain from doing so if these changes were reversed," says petition signatory Marc von Grundherr, Director of Benham and Reeves.
However, the government has responded to the petition saying that it will “continue to set mortgage interest relief against rental income at the basic rate of tax."
This is to ensure that the income tax system is "fair" to all involved, rather than giving landlords certain rights over and above homeowners - as was the initial intention of the changes.
Although it has a way to go, the petition will be considered for debate in parliament if it hits 100,000 signatures.
This article is intended as a guide only, and does not constitute legal advice. Visit gov.uk for more information.