What is Section 24? A Guide for Landlords

Section 24 of the Finance Act 2015 has presented some unique challenges to property investors and landlords, but what is Section 24 and how does it work? In this blog, I will take a look at what Section 24 is, how it came to be part of UK law, and how it has affected landlords.

Table of Contents

What is Section 24?
Why Was Section 24 Created?
How Has Section 24 Affected Landlords?
Does Section 24 Apply to Limited Companies?
How to Avoid Section 24

What is Section 24?

Section 24 is part of the Finance Act 2015 and prevents landlords from offsetting mortgage interest and other finance costs against their rental income for tax purposes. After the Finance Act 2015 passed, landlords who owned properties in their own names, as opposed to in the name of a limited company, could only get a basic 20% tax relief on interest payments. Basically, landlords would have to pay taxes based on their gross profits rather than net profits.

Why Was Section 24 Created?

Section 24 of the Finance Act intended to level the playing field between homebuyers who wanted to live in the property and those buying a home to rent out to tenants. It was meant to increase homeownership levels and get more first-time buyers on the property ladder, as well as slowing the growth of the private rental sector. Section 24 was gradually passed into law between 2017 and 2021. During this time, HMRC phased in a basic rate relief tax reduction of 20%, offering landlords the chance to offset at least part of their costs against profits.

How Has Section 24 Affected Landlords?

Since its implementation, Section 24 has increased the amount of tax a landlord would have to pay. This could even move a landlord into a higher tax band, so they would be subject to even higher tax rates, despite their income not changing. Section 24 is most costly for landlords who have just one or two properties as they are most likely to be pushed into that higher tax bracket. With the rise of mortgage interest rates in recent years, some profits could fall to the point where it is no longer financially viable for some to continue being a landlord.

Does Section 24 Apply to Limited Companies?

No – limited companies are exempt from Section 24 and are able to offset 100% of mortgage interest and other fees against profits as a business expense. Limited companies do have to pay corporation tax, but this is charged at a lower rate than personal income and Capital Gains Tax.

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How to Avoid Section 24

There are some ways that property investors and landlords can avoid paying the higher tax rates introduced by Section 24.

Transfer the Property to a Limited Company

As mentioned previously, limited companies are exempt from Section 24. This means that landlords could start a limited company with themselves as the company director, and transfer the properties they own to the limited company. This method does not mean that no taxes need to be paid – limited companies still need to pay corporation tax. It is also possible that a landlord would need to pay Capital Gains Tax and Stamp Duty if they transfer their property to a company unless they can claim Incorporation Relief. In order to do this, a landlord must prove to HMRC that they are running a business and not just making a profit from passive investments. This can be done by demonstrating that they do 20 hours or more work per week relating to their properties.

There are some disadvantages to this strategy – it can be more difficult for a limited company to obtain a mortgage for a property and could be subject to a higher interest rate for the mortgage, due to the tax breaks offered to limited companies.

Transfer the Property to a Lower Income Partner

If a landlord’s spouse or partner is in a lower tax bracket than them, the landlord could transfer half or all of the property into the partner’s name to reduce the amount of tax paid on the rental income. Gifts between spouses are exempt from Capital Gains Tax so the transfer can be done without incurring any costs other than Stamp Duty. I suggest seeking advice from an accountant or financial advisor before doing this to make sure it is in your best financial interests.

Change the Property to a Holiday Let

Furnished holiday lets (FHLs) are currently exempt from Section 24 as they are treated as a trading business, as it takes more work to run a holiday let than a regular residential let. Legally, a holiday let must be available for at least 210 days per year and must be let for a minimum of 105 days. This type of property also cannot be let for more than a month at a time. This is not suitable for many properties, so it is common for landlords to declare one property in their portfolio as a holiday let and secure other mortgages on that property in order to offset the finance costs on the holiday let and take advantage of the tax exemption.

The previous Conservative government had plans to withdraw the tax exemption from Furnished Holiday Lets as of April 2025 and replace it with a 20% tax credit. Following the general election, this change in the law was uncertain under the new Labour government, but at the time of writing (August 2024), Labour still plans to abolish the FHL tax regime as originally planned.

The strategies outlined above can help landlords avoid paying extra tax under Section 24, but they are not without their own drawbacks – consult with an accountant or tax advisor and stay updated with all changes in the law to make sure you are making the right decision before taking action.

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