Section 24 Tax Changes: The Unvarnished Impact on London BTL Landlords with 1-5 Properties - Calculations and Real-World Workarounds

In 2017, a tax change crept up on London's buy-to-let (BTL) landlords, reshaping the landscape of property investment. Known as Section 24, this legislation phased out the ability for landlords to deduct mortgage interest from their rental income before calculating tax. The full effect was felt by 2020, sending ripples through the portfolios of many unsuspecting investors across the capital.

Quick Answer Box

Section 24 means you can no longer deduct mortgage interest from rental income pre-tax. Instead, you get a 20% tax credit. For higher-rate taxpayers in London, this could significantly increase your tax bill. Strategies to mitigate the impact include transferring properties to a limited company or increasing rent, but each comes with its own complications and costs.

How Section 24 Works

Previously, landlords could deduct mortgage interest and other allowable costs from their rental income, paying tax only on the net income. Section 24 replaced this relief with a tax credit, worth 20% of your mortgage interest. This shift dramatically affects landlords in higher tax brackets, essentially increasing the amount of tax payable.

The Real Cost of Section 24 for London Landlords

Let's break down the numbers for a typical London BTL property:

• Pre-Section 24: Rental income of £24,000 (assuming £2,000/month), with annual mortgage interest of £10,000. The taxable income would be £14,000.
• Post-Section 24: The same landlord now receives a 20% credit on the £10,000 interest, equating to £2,000. If they are a higher-rate taxpayer, they pay 40% on the full £24,000, which is £9,600, minus the £2,000 credit, resulting in a final tax bill of £7,600.

Compared to pre-Section 24, where the tax due might have been around £5,600 (£14,000 at 40%), the increase is stark.

X vs Y: Limited Company Ownership vs Personal Ownership

Limited Company Ownership

• Pros:
• Corporation tax (currently 19%) is lower than personal income tax rates.
• Full mortgage interest can be deducted before tax.
• Cons:
• Higher lending rates for corporate mortgages.
• Additional administrative and accounting costs.

Personal Ownership

• Pros:
• Simpler to manage without the need for company administration.
• Potential for Capital Gains Tax allowances.
• Cons:
• Higher tax liability due to Section 24.
• No mortgage interest relief against income tax.

Calculating the Impact: A Real Example

Consider a portfolio of 3 properties in E1 (East London), with an average rental yield of 4.5%. If the total rental income is £72,000 and the mortgage interest is £30,000:

• Pre-Section 24: Net income = £42,000. Tax (higher rate) = £16,800.
• Post-Section 24: Tax credit = £6,000. Tax on full income = £28,800 (minus tax credit) = £22,800.

The difference in tax payable is a whopping £6,000 annually, just for a modest portfolio.

Step-by-Step Process to Mitigate Section 24 Impact

1. Assess Your Position: Calculate your current tax liability under Section 24.
2. Consider Transferring Properties to a Limited Company: Consult with a tax advisor to evaluate the benefits and costs.
3. Increase Rents Strategically: Ensure you remain competitive while covering higher tax costs.
4. Review Mortgage Products: Refinancing could lower your interest payments, albeit at possibly higher rates for companies.
5. Expand Revenue Streams: Consider ways to increase income from your properties, such as adding services or utilities.

What's Next? Specific Actions for London Landlords

1. Run the Numbers: Use online calculators or work with an accountant to see how Section 24 affects you.
2. Consult a Specialist: Tax advisors familiar with BTL investments can offer personalized strategies.
3. Plan for the Long Term: Whether it's restructuring your portfolio or changing your investment strategy, consider how to position yourself for future success.

In the wake of Section 24, London landlords must navigate a more complex tax landscape. The strategies discussed here are not one-size-fits-all solutions but starting points for adapting to these changes. With careful planning and advice, you can mitigate the impact of Section 24 on your investments.