The tax landscape for UK landlords has evolved considerably over recent years, with major reforms reshaping how mortgage interest is handled for rental properties. If you’re a landlord in 2024, you might be wondering if you can still deduct mortgage interest from your rental income and how to navigate the changes introduced under Section 24.
This guide will break down the current rules, strategies for minimising your tax burden, and how landlords can still benefit despite the reforms.
Can You Deduct Mortgage Interest on a Rental Property? – Before and After Section 24
Before 2017, landlords could fully deduct mortgage interest payments from their rental income. This significantly reduced their taxable profits, making it easier to maintain higher profits, especially for those with multiple properties.
However, the UK government phased out this relief in a bid to level the housing market and prevent landlords from gaining disproportionate tax advantages.
Section 24, introduced between 2017 and 2020, fundamentally changed how landlords calculate their taxes. Instead of deducting mortgage interest from their rental income, landlords now receive a 20% tax credit on their mortgage interest costs.
This means that while mortgage interest no longer directly reduces taxable income, landlords can still claim a portion of the interest back as a tax credit.
The phased introduction meant that landlords only felt the full impact of Section 24 in the 2020 tax year and remained in place in 2024.
This reform has led to higher taxable profits for many landlords, particularly those in higher tax brackets, who no longer benefit from the full tax relief on mortgage interest. This has forced many landlords to reconsider their strategies and the profitability of their rental portfolios.
How the Mortgage Interest Tax Credit Works in 2024?
Under Section 24, landlords now receive a 20% tax credit on the mortgage interest they pay. This tax credit applies to the lower of three key figures:
- The total amount of mortgage interest paid in the tax year.
- The profit from the rental property before mortgage interest is deducted.
- The landlord’s total adjusted income exceeds the personal allowance.
For example, let’s say a landlord pays £5,000 in mortgage interest in a given year and earns £20,000 in rental income after other expenses. The tax credit would be applied to the £5,000 mortgage interest, resulting in a £1,000 tax credit (20% of £5,000).
This credit is particularly valuable to basic-rate taxpayers. Still, the change has resulted in a significantly higher tax burden for higher-rate taxpayers, as the mortgage interest no longer directly offsets their rental profits.
Landlords now face the challenge of calculating their taxes with this complex system, making it crucial to keep accurate records of their mortgage payments, rental income, and any allowable expenses.
This system has proven particularly problematic for landlords who are pushed into higher tax brackets due to these changes, as the increased taxable income can dramatically affect their overall tax bill.
Buy-to-Let Mortgages: Are They Still Profitable?
Many landlords are wondering whether buy-to-let mortgages remain a viable investment option under these new tax rules. The removal of full mortgage interest relief has undoubtedly reduced the profitability of rental properties for many landlords.
The tax changes have significantly impacted the ability of smaller landlords operating on thin margins to generate a profit from their rental properties.
However, buy-to-let investments can still be profitable, especially for landlords with lower mortgage debt or those who have already paid off their properties. Landlords with low debt levels or who have incorporated their properties into limited companies are better positioned to handle the new tax rules.
For those heavily reliant on mortgage financing, the tax changes have led some landlords to sell off properties, particularly in high-demand areas where property prices are rising but rental yields have stagnated. Others have adapted by seeking professional tax advice, exploring new financial structures, or passing property ownership to spouses or partners in lower tax brackets.
Incorporating Your Rental Property: A Way to Offset the Tax Impact
One of the most effective ways for landlords to mitigate the effects of Section 24 is by incorporating their property portfolios into limited companies. This is because the tax restrictions of Section 24 do not apply to companies. As a result, landlords operating as limited companies can continue deducting 100% of their mortgage interest from their rental profits, significantly reducing their taxable income.
Incorporating comes with several advantages, such as the lower corporation tax rate, which is currently lower than the higher rate of income tax that many landlords are subject to. It also allows landlords to reinvest profits into their portfolios more efficiently. However, incorporation is not without its downsides. Transferring properties to a limited company can trigger capital gains tax (CGT) and stamp duty liabilities, making it a more complex and potentially costly decision for landlords.
For landlords with large portfolios, the benefits of incorporation may outweigh the costs, but for smaller landlords, the administrative burden and initial expenses may be a deterrent.
Can I Claim Tax Relief on Mortgage Interest?
In the UK, claiming tax relief on mortgage interest depends on the property type and your situation.
1. Residential Properties (Personal Homeowners)
If you’re a homeowner and live in the property, you cannot claim tax relief on mortgage interest payments. This tax relief was phased out years ago, so personal homeowners no longer benefit from this.
2. Buy-to-Let Properties (Landlords)
The rules are different if you’re a landlord with a buy-to-let property. In the past, landlords could deduct all mortgage interest from their rental income before calculating tax. However, this changed from 2017 to 2020, when the government phased out the old system.
Now, landlords receive a tax credit of 20% on their mortgage interest payments. Here’s how it works:
- You can no longer deduct mortgage interest from your rental income.
- Instead, you get a basic rate tax reduction (20%) on the mortgage interest.
For example, if you pay £1,000 in mortgage interest, you’ll receive a £200 tax credit, reducing your tax bill by that amount.
3. Furnished Holiday Lets
If you have a furnished holiday let property, you may still be able to deduct mortgage interest from rental income. Furnished holiday lets have special tax rules, and mortgage interest can still be claimed as a business expense.
Other Tax-Deductible Expenses for Rental Properties
Although mortgage interest relief has been significantly restricted, landlords can still claim various tax-deductible expenses to help reduce their tax liabilities. These allowable expenses include:
- Property maintenance and repairs: Costs incurred for necessary repairs, such as fixing appliances, plumbing issues, or repainting. These expenses must be related to maintaining the property in a rentable condition.
- Insurance costs: Landlords can deduct insurance premiums, including buildings insurance, contents insurance, and landlord insurance. These cover the property’s structure and the contents provided as part of a furnished rental.
- Letting agent fees: The fees paid to letting agents manage the property can also be deducted from taxable rental income.
- Replacement of furnishings: If a landlord replaces worn-out or broken furniture, appliances, or other furnishings, the costs can be claimed as long as the replacement is like-for-like and not an improvement on the original item.
While beneficial, these deductions do not offset the loss of full mortgage interest deductions, making it crucial for landlords to keep accurate and detailed records of all expenses.
Tips for Managing the Tax Burden
To effectively manage the tax burden imposed by Section 24, landlords should consider several key strategies:
- Increase pension contributions: By contributing more to a pension, landlords can reduce their taxable income, which can help mitigate the impact of higher tax liabilities.
- Explore incorporation: As mentioned, incorporating a property portfolio can allow landlords to deduct mortgage interest in full, though this comes with its own set of financial implications.
- Transfer ownership: If a landlord’s spouse or partner is in a lower tax bracket, transferring a rental property can help lower the overall tax liability.
- Professional advice: With the complexity of the current tax landscape, seeking professional advice from a tax accountant or financial advisor is highly recommended to ensure that landlords maximise their tax relief and navigate the rules correctly.
Conclusion
The tax rules surrounding mortgage interest deductions have changed dramatically for UK landlords, particularly under Section 24. While you can no longer deduct mortgage interest from your rental income, the 20% tax credit provides some relief. However, this change has pushed many landlords into higher tax brackets, prompting some to consider alternatives like incorporating their properties or selling their portfolios.
Ultimately, careful planning and professional advice are key to navigating the complex tax landscape in 2024. Whether you’re a small landlord with a single property or a seasoned investor with a large portfolio, understanding the rules and exploring the available options is essential to maintaining profitability.
What Are the FAQs About Deducting Mortgage Interest in 2024?
Can I deduct full mortgage interest if I’m a basic-rate taxpayer?
No, regardless of your tax bracket, Section 24 limits the deduction of mortgage interest. You receive a 20% tax credit instead.
Does Section 24 apply to limited companies?
No, limited companies are exempt from Section 24. They can still deduct mortgage interest in full.
How does Section 24 affect accidental landlords?
Accidental landlords—those who rent out former homes—may face higher tax bills due to Section 24. The impact can be significant if their rental income and other earnings push them into a higher tax bracket.
Can I still claim relief if my rental property runs at a loss?
Yes, even if your property is lost, you can still claim the 20% tax credit on your mortgage interest payments.
How does incorporation help reduce my tax bill?
Incorporating your property portfolio allows you to deduct 100% of mortgage interest, as companies are not subject to Section 24 restrictions.
What other expenses can I deduct from my rental income?
You can deduct expenses such as repairs, insurance, letting agent fees, and replacing worn-out furniture.
Is it better to sell my rental property because of the tax changes?
Selling may be the best option for some landlords due to reduced profitability under the new tax rules. Others may find that incorporating or adjusting their financial strategies allows them to maintain profitability.
