What is Section 24? A guide for landlords

It’s been five years since the restriction of buy-to-let mortgage tax relief, also known as Section 24. How have these controversial tax changes affected landlords and the rental market since 2017?

Read on to find out if predictions that they’d cause higher rents, more buy-to-let companies, and landlords to sell up were right.

What is Section 24?

In 2015, then-Chancellor George Osbourne introduced a restriction on tax relief on buy-to-let mortgages. This controversial tax change is known as Section 24.

Since the introduction of Section 24, all of the rental income made from a property is taxed. Landlords can claim back mortgage interest costs but only up to the basic income tax rate of 20 per cent. The changes were rolled out from 2017 and came into full effect in April 2020.

Before the first stage of the tax changes in 2017, landlords could deduct all of their mortgage interest from their rental income and pay tax solely on their profits.

But Between April 2017 and April 2020, mortgage interest tax relief was gradually reduced and ultimately replaced with a 20 per cent tax credit.

Why was Section 24 introduced?

Section 24 was part of the government's plan to slow down the growth of the private rental sector. With the private rental sector growing, it became more difficult for first-time buyers to get on the property ladder.

In April 2016, the government also introduced a three per cent stamp duty surcharge that affected landlords buying second properties. This meant landlords would pay additional tax on top of standard stamp duty.

So, Section 24 came as a part of the government's broader strategy to ‘level the playing field’ between landlords and first-time buyers.

How have landlords responded?

Ever since its introduction, Section 24 has been extremely unpopular with landlords. It’s affected how much profit they make from their properties and left them paying much higher taxes.

There have been several attempts to stop Section 24, including a high-profile legal challenge led by Cherie Blair. And most recently, there’s a petition to the government with over 32,000 signatures to “reinstate tax relief allowing mortgage interest to be set against rental income”.

But despite all the challenges, the government has stood by its decision. In response to the petition, a government spokesperson said:

“The Government will continue to set mortgage interest relief against rental income at the basic rate of tax. The Government has a responsibility to make sure the income tax system is fair.”

The impact of Section 24 on landlords

With the government committed to its plans to reduce buy-to-let mortgage interest tax relief, many landlords have taken steps to minimise the impact of the tax changes.

Some have chosen to work around it by remortgaging for a more competitive rate, while others have transferred ownership to their partner to avoid paying additional tax.

But there’s been other strategies that have had an effect on tenants and the UK’s housing market.

Transferring property ownership to limited companies

One way landlords have looked to minimise the impact of the restriction of mortgage interest tax relief is to transfer ownership of their property to a limited company.

Landlords who incorporate their portfolio pay corporation tax instead of income tax, meaning they don’t pay more tax due to Section 24 and benefit from several other tax incentives.

Companies House data, analysed by Hamptons, shows a rising trend in incorporating buy-to-let companies in recent years:

There’s also been a surge in the number of buy-to-let mortgage products suitable for limited company landlords to reflect demand.

Further analysis from Hamptons shows that between the beginning of 2016 and the end of 2020, more companies were set up to hold buy-to-let properties than in the previous 50 years combined.

At the end of 2022, there were over 300,00 buy-to-let companies in the UK, up from around 200,000 in mid-2020.

Selling up and leaving the buy-to-let market

For some landlords, selling up and leaving the buy-to-let market was the most cost-effective option. Especially landlords with one or two properties as they’re more likely to be pushed into paying a higher tax rate than landlords with larger portfolios.

A Simply Business survey of over 600 landlords in 2022 found that 33 per cent feel their properties are no longer as profitable following the restriction of buy-to-let mortgage interest tax relief.

Some other key findings included:

• the impact of the buy-to-let mortgage tax changes has led to 16 per cent of landlords selling a property or considering selling one

• increased tax relief for landlords would prevent 28 per cent from selling a property in the future

And according to stats from Propertymark there’s been a 13 per cent increase in landlords selling their property between July to October 2022.

Even though this increase is likely related to the rising cost of living and inflation – Section 24 has hit landlords’ profits which makes further cost increases harder to handle.

Raising tenants’ rent

Section 24 has put pressure on landlords’ finances and it’s potentially had a knock-on effect on tenants’ rent.

The table below shows the average national asking rent (excluding Greater London) tracked across six years by Rightmove.

As you can see, average rents increased significantly between 2017 and the end of 2021, by which time mortgage interest tax relief had been reduced in full.

And this figure has kept on rising, with Rightmove’s national average asking rent reaching £1,172 by Q4 2022.

It’s important to note that Section 24 is likely to have been one of many contributing factors to higher rents, such as:

• the ban on upfront letting agent fees

• changes to stamp duty and capital gains tax

• new regulation such as mandatory electrical safety checks

• higher tenant demand

• lower stock levels

What is the wider impact of Section 24 on the housing market?

If landlords decide to remove their properties from the rental sector, the consequences for tenants and the housing market could be significant.

There are a growing number of tenants looking for rental properties in the UK and if there are fewer properties on the market, competition for those that remain is likely to be higher.

A lack of housing options and higher average rents would be who enjoy the flexibility of rental properties as their rents would rise.

And with costs rising for tenants in every aspect of their lives due to the cost of living crisis, it will make saving for a deposit even more difficult.

Landlords’ strong opposition to Section 24 doesn’t just relate to their own rising costs but also the broader effect on the housing market. But despite their best efforts to overturn it, the government seems determined to stick to its plan for the private rental sector.

More useful guides for landlords

• How can landlords get a buy-to-let remortgage?

• What does the scottish rent freeze mean for landlords?

• Landlord's guide to sitting tenants
• How much landlord insurance do I need?

How have you been affected by Section 24? Let us know in the comments below.