Introduction
Are you looking to learn more about the rules of section 24 and need to know the legislation in depth? In this article, we’ll be going through all the frequently asked questions to do with this part of the law, making sure you are prepared for any changes to do with it in the future.
As a result, if you don’t stay on top of this you could be taken to court or potentially face fines. Read on so you can avoid the pain of paying back taxes you didn’t think you owed.
What is section 24?
Section 24 is a new rule set in 2017 that means landlords will no longer be able to deduct house mortgage payments from the taxes that have to be paid at the end of the tax year. However, to aid lower income earners who are landlords, the government phased in tax relief credit.
This was done over time with very little credit given at the start in 2017 and a lot of your mortgage payment being able to be deducted from tax. Then, over the years, there is now a lot of tax relief granted and mortgage payments are no longer deductible.
These rules were introduced to still favour the landlords who are smaller in size by providing some credit but also level the playing field between buy to let owners and those who own a residential mortgage. No one is now able to deduct their mortgage payments from their taxable income.
Why is section 24 known as the tenant tax?
Section 24 is known as the “tenant tax” because it penalises those who have tenants on their property. Homeowners already are taxed on their mortgage payments because they have to earn an income and then pay the mortgage on their property.
However, landlords (who house tenants) used to be able to write off the mortgage they owe first and then produce an income. Hence, the tenant tax refers to landlords who have tenants and have lost this ability.
This is a simpler way of saying the full name of the legislation which is section 24 of the Finance Act 2015. These terms are talked about less and less as people get used to the new rules surrounding section 24. The phasing in of the act is now over as of 2021 so it is just a matter of following the rules now they have stagnated.
What mortgage interest tax relief credit?
Mortgage interest relief or tax relief credit is completely different to a credit check or a credit score. They are reimbursements of tax paid as a percentage of the amount of mortgage repayment a landlord has. This is to help offset the impact of getting rid of mortgage payments as a tax-deductible income.
Most of the time, landlords will be able to comfortably pay their mortgage and still benefit from these credits because the bank that lent them the mortgage would have calculated this in their mortgage application.
This is because the mortgage application is based on the rental income from the property rather than the personal income of the landlord.
However, you can read some tips about obtaining a mortgage without payslips here if that is what you’re after.
The mortgage must be used for property you are renting out in a buy to let mortgage so is not eligible for residential mortgages like 95 mortgage.
How to make sure you’re paying the right amount under section 24
Section 24 is a tax that most people see as complicated because it isn’t really a direct tax that is there to charge landlords. Instead of the tax being charged as a percentage like stamp duty or charged on a sale like in corporation tax, the act just forces landlords to pay more in tax than they are already paying by reducing what is tax deductible.
First of all, you have to understand the tax credits that are involved with section 24. Things are vastly different if you are a basic rate taxpayer compared to if you are a higher rate taxpayer or worse yet an additional rate taxpayer. For a full breakdown of these income tax rates take a look at the government website here.
So this part of section 24 makes sense, let’s use three examples. One is if you pay tax at a basic rate, one if you pay tax at an additional rate and a final one if you pay your taxes without going through personal income tax but instead register your property business in a limited company and pay corporation tax.
In example one, you are a basic rate taxpayer trying to calculate your tax bill under section 24. You take home £10,000 for the year net rental income and £9,000 of this figure is mortgage payments. You are first taxed 20% on net rental income based on the income tax rate and produce £2,000, then you would get tax relief of 20% of the mortgage payments producing £1,800.
In total, therefore you pay £2,000 and earn back £1,800 so are left with £200 to pay.
In example two, you are an additional rate taxpayer trying to calculate your tax bill under section 24. The same rules apply. A property makes £10,000 for the year net rental income and £9,000 of this figure is mortgage payments. You are first taxed 45% on net rental income based on the income tax rate and produce £4,500, then you would get tax relief of 20% of the mortgage payments producing £1,800.
In total, you pay £4,500 and earn back £1,800 so are left with £2,700 to pay.
This difference between lower rate taxpayers and higher rate taxpayers is huge. One individual just has to pay £200 whereas another has to pay £2,700 in this case. However, there are ways around this and this brings us to the final example, keeping a property in a limited company which avoids paying personal income tax. These corporation tax figures are seen here.
In example three, you are a limited company owner trying to calculate your tax bill under section 24. A property in your company makes £10,000 for the year net rental income and £9,000 of this figure is mortgage payments. You are first taxed 20% on net rental income based on the rate of corporation tax and produce £2,000, then you would get tax relief of 20% of the mortgage payments producing £1,800.
In total, the amount of tax you would pay is the same as someone paying basic rate tax with a property in their personal name at £200! Therefore, a landlord can earn a lot more without having to pay as much tax. This is why there has been a shift after 2017 in the number of property owners forming limited companies.
If you are earning more than £150,000 per year in income, it is simply not worth it to keep a property in your personal name.
However, it is important to note that someone who has a limited company will still need to pay themself a salary out of the company in order to spend the money in the company and then this is charged personal income anyway.
But, in general, the rate of tax is far less and there are a series of tax relief benefits that a landlord can take advantage of by having a limited company anyway.
How to claim tax relief under section 24
In order to go through this process with the government, you will need to contact HMRC and inform them of all the details of the ingoings and outgoings of your property in the past tax year. This should be done before April 1st of every year.
Over the following year, HMRC will pay you back the tax that is owed to you if there are any mistakes but this is usually sorted out fairly easily.
Where do you enter mortgage interest on a self assessment?
When filling out the self assessment for you to submit to HMRC, the form will ask you about your buy to let mortgage and specifically what the interest is on the mortgage.
This may be unclear for some but you should enter it in the box 42 which is in the section of the form labelled “residential property finance costs”.
What is the difference between SMI and section 24?
SMI stands for “support for mortgage interest”. This is a scheme from the government which aids people who own homes and are paying off their mortgage.
Section 24 and SMI are often confused because they both refer to mortgage relief but they are in fact very different. SMI refers to helping people on benefits who are struggling to pay a household mortgage and Section 24 helps to let landlords benefit from tax relief on their mortgage payments.
What can a landlord deduce from the gross rental income prior to tax?
Knowing what is allowed to be deducted for tax purposes is essential. The blow list is an extensive series of costs that you can deduct from the net rental income a property business produces. However, if you’re not sure about any of these items then you should speak to a qualified solicitor or accountant who will help you make decisions.
- Generic maintenance of a property without improving a property (Such as repairing a broken boiler as opposed to replacing the gas system of a property due to the need to make enhancements)
- Council tax
- Gas and electricity charges
- Water bills from the tenant’s living costs
- All types of insurance such as landlords insurance, home insurance or rent guarantee insurance
- Charges associated with hiring people for services in the property such as concierge costs, cleaning costs and maybe gardening costs
- Letting agent fees
- Management fees
- Legal fees if the the legal costs are for renewing a lease that is less than 50 years long
- Legal fees if the legal costs are for leases less than a year long
- Accounting costs
- Service charges
- Ground rent (charged in leasehold agreements)
- Any ret that you have to pay as a sub letter in a property
- Costs associated with marketing for new tenants, equipment for the promotion of our business or the costs of phone calls and communication with people to help let out your property
- Vehicle running costs (You will be able to deduct an amount of petrol used per mile in your property business)
What can’t a landlord deduce from the gross rental income prior to tax?
Mortgage repayments are the most surprising thing on the list that isn’t tax deductible. However, make sure you are complying with the rest of the list in order to not avoid tax that could result in fines and potential imprisonment for fraud.
- Your mortgage repayments (only the interest part of a loan can be offset against the rental income of a property so this is only deductible for those using interest only buy to let mortgages)
- Private telephone calls which aren’t associated with our property business and are for calls in your personal life
- Clothing (even if you wore clothes as part of your property business, this isn’t usually allowed due to the need to wear clothes anyway. Unless you can prove you needed a specific time of clothing for a specific part of your business this is not allowed.)
- Personal expenses that are not to do with the property business you have
If a landlord finds they aren’t able to deduct enough to make a profit, they may have to find other ways to make their property investments affordable like buying a house with no money.
How can landlords protect themselves from financial loss?
One of the easiest ways to protect yourself from financial loss as a landlord is by staying on top of the law. It is difficult when you are constantly reading about what you owe and going over this with a qualified solicitor or accountant. This means when something doesn’t add up you are better able to identify it in your property business.
Besides this, with the understanding that not everything is in your control as a landlord, you can ensure you have the correct safeguarding in place.
This can include paying for landlords insurance that includes protecting the contents of your home from damage, rent guarantee insurance that means you never miss a rental payment or even increasing the rent in the first place to make sure there is more of a safety net in case something were to go wrong.
Finally, there are a lot of expenses to do with a property business and you may be able to cut back on costs by comparing the price different companies charge for things like repairs or maintenance. For example, there may be a property manager that you can hire for less who will do just as good a job if not better.
Constantly going back to what you are paying for even if you think you made a good decision at the time is a wise idea.
Can you claim section 24 if it is your main residence?
If a property is your main place of residence then you won’t be able to claim section 24. This is because section 24 applies to buy to let mortgages and buy to let mortgages are paid off based on the income from the rents that tenants pay in a property.
On the other hand, a main residence is a house you’re living in where the mortgage is paid off using a personal income.
There are cases where a landlord can pay off a buy to let mortgage using their personal income. But this is never planned as a lender will only issue a buy to let mortgage that can be paid off from the rental income a property produces.
Where a landlord has to use their personal income to pay off a buy to let mortgage it is likely something has gone wrong financially but the landlord still doesn’t want to lose the property so is paying with cash that hasn’t been produced from the property.
Separate from an example like this, a landlord can also have a main place of residence and a buy to let property as a second home and use the income from the buy to let property to pay off the mortgage for their residential home. This would work in the same way as anyone else paying off the mortgage on a house.
Are there any changes coming to section 24?
As of 2022, there are no more changes set to be introduced by the financial secretary in the UK and all changes have taken place. This is following a four-year plan starting in 2017 to slowly phase out the proportion of a mortgage that is tax deductible and slowly phase in the amount of tax relief credit that can be applied to the tax bill of a landlord.
In conclusion
When looking at section 24 overall, the law is a complicated part of property tax to understand without a doubt. Having said this, dedicating some time to understand it in detail is well worth it if you are a landlord or thinking about becoming a landlord. The first place to start would be to calculate what you owe to the best of your ability, check this with someone or use a calculator and complete a self-assessment form with the HMRC which you can find here.
In addition, pay extra attention if you have a mortgage capacity report involved as this can get complicated and you may need to speak to a financial advisor.
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