Section 24 at a glance
What is Section 24?
Section 24 of the Finance Act 2015 was introduced by George Osborne in an apparent bid to “create a more level playing field between those buying a home to let and those buying a home to live in” (UK Parliament).
Section 24 restricted a landlord’s ability to deduct mortgage interest and other finance costs (such as mortgage arrangement fees) against their rental income for tax purposes. As these costs were previously treated as an expense for tax purposes, they could be offset against landlords’ profits and reduce their tax bill.
How has Section 24 impacted landlords?
Now individual landlords only get a 20% credit on interest payments, instead of being able to deduct all mortgage expenses from their rental income.
With the increases in interest rates in 2022 and 2023, landlords may now be in the situation where they are making a loss in real terms, as their costs are more than the rent they receive. However, they are taxed on a paper profit that doesn’t recognise how much they’re paying in interest.
This has unfortunately contributed to many landlords deciding to sell up, and leave the private rented sector.
What about limited companies?
Section 24 doesn’t apply to corporate landlords who own their properties through a limited company. Paradoxically, these companies may still set off all financing costs against rental income.
Consequently, instead of creating a level playing field for all, George Osborne introduced unequal treatment between individual landlords and corporate landlords.
As section 24 does not apply to limited companies, many landlords now buy new rental properties through a limited company. Hamptons have estimated that around half of investor purchases in 2021 were by a limited company. They have also calculated that there are now 270,000 buy-to-let companies in operation.
It is possible for an individual to move a buy to let portfolio to a limited company. However, this is costly due to stamp duty and CGT being payable.
For lower-rate taxpayers the benefits of using a limited company are far more marginal.
What about short-term lets and serviced accommodation?
As the tax rules currently stand, income from “furnished holiday lettings” are treated differently from normal rental income. If a property quailifies as furnished holiday lettings, Section 24 won’t apply. This means the owner can set off their full mortgage costs against their income from guests.
You can find out the 2023 rules for qualifying as furnished holiday lettings here, but here’s an overview:
- The Pattern of Occupation: No single let in a tax year may be more than 155 days
- The Availability Condition: The property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year
- The Letting Condition: The owner must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets to friends or relatives at zero or reduced rates are excluded. Lets over 31 days are excluded, apart from some exceptions.
Final thoughts
The impact of Section 21 has fell heavily on landlords who invested as individuals. It is little wonder that so many have decided to sell up, or change to furnished holiday letting.
You may also find useful
Are limited companies best for landlords?
How to terminate a tenancy using Section 21
What impact will abolishing Section 21 have on the PRS?
Is passive income a myth for landlords?
