Section 24, also known as the ‘tenant tax’, means that landlords will only be able to claim tax relief on mortgage interest and other financing costs at the basic rate of tax. 

It will mean significant extra tax bills for landlords who are already higher-rate taxpayers, and will push some landlords who are currently basic rate taxpayers into higher-rate tax. There is a fear that the extra tax bill will mean that many landlords decide to sell up, leading to a shortage of rental property — hence the ‘tenant tax’ moniker.

Here’s how it works, and what it could mean for you. 

Section 24 phase-in

The changes are being phased in in four stages from April 2017. From April 2021, they’ll be fully enforced.

• 2017/18 tax year — only 75% (rather than 100%) of finance costs tax-deductible at the higher-rate (and the rest at basic rate).
• 2018/19 tax year — 50% of finance costs tax-deductible at the higher-rate.
• 2019/20 tax year — 25% of finance costs tax-deductible at the higher-rate.
• 2020/21 tax year — only basic rate deductions, though 20% of finance charges will be offset against tax.

Finance costs mostly means mortgage interest, but can also mean mortgage fees and interest on loans taken out to furnish or refurbish a property. 

Other costs, including maintenance, can still be offset against tax.

What’s the thinking behind Section 24?

Section 24 was introduced by George Osborne when he was chancellor in David Cameron’s government. 

He believed that it was unfair that landlords should get tax relief on mortgages when owner-occupiers do not, saying “Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas home-buyers cannot.” 

He believed that the changes would reduce demand from landlords making it easier for first-time buyers to get on the ladder. 

How will this affect individual landlords?

Landlords who are already higher-rate taxpayers will be hardest hit in cash terms, but it may be that it’s landlords who are currently basic-rate taxpayers and are moved into higher-rate tax who will find it most difficult to cope. 

Mortgage interest is currently deducted from income for tax purposes. Under the new system, it won’t be. The ‘extra’ income could push a landlord up a tax bracket, when salary and rental income are added.

What effect is Section 24 having?

There’s no doubt that landlords are worried. According to a survey by Simple Landlords, 47% of landlords have changed their investment plans as a result of the changes, and 6% plan to sell up completely (or have already done so). And a survey by the Residential Landlords Association showed that 25% of landlords are planning to sell one or more properties in the coming year. 

It seems inevitable that section 24 will contribute to rental shortages, especially in London and other high-demand areas. According to Rightmove, there are 33% fewer rental properties in the capital now than there were two years ago. 

Section 24 is certainly not the only reason for this. Landlords now face additional stamp duty costs and often higher mortgage rates than in the past. Changes to the eviction process with the abolition of no-fault evictions are also to blame.

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Who’s most affected by Section 24?

Landlords with one or two properties are most affected, including accidental landlords. They’re the landlords most likely to be in the group pushed from basic to higher rate tax, and they’re less likely than others to be able to absorb extra costs. 

Is there a way around the changes?

Yes. Landlords can set up a limited company and buy a property using that company, or transfer ownership of an existing property.

Corporation tax is currently 19% and is set to reduce to 17% in 2020. That’s a lot lower than the 40% higher rate, and 45% additional rate tax. Mortgage interest can be offset completely against tax as a business expense.

But it’s not the right option for everyone. You’ll probably need to pay stamp duty and capital gains tax if you transfer a property to a company, as the legal ownership will have changed. 

And you’ll need to get your money out of the company (unless you plan to reinvest all of it), which leaves you liable for more tax. You can get £2000 of dividends tax-free, and then pay between 7.5% and 38.1% tax depending on your tax band. 

You may also find it harder to get a mortgage as a company, though more lenders are offering limited company buy-to-let mortgages.

If you choose to go the limited company route, you’ll need an accountant to help you work out the most tax-efficient way to manage your income. 

Anything else landlords should know?

It can seem as if landlords are being financially hammered at every turn. But it’s not all bad news: there is no shortage of demand for quality rental properties in London and no sign of rents dropping. Mortgage rates may well fall in the aftermath of Brexit. House prices are already dropping and may well drop further. 

All this means that landlords who know where to invest can still make good returns, with yields of over 4% in many areas. Take a look at our guide to London’s hotspots to see where the smart money’s going in the capital.