Section 24 of the Finance Act 2015 applies to buy-to-let landlords with residential rental properties across the UK and could affect how much tax you pay on your rental income.
Phased in over four years from 2016, Section 24 became fully operational in April 2020. It means that if you rent out a home, and have a mortgage on that property, you can only claim mortgage interest relief at the basic rate of income tax, even if you pay tax at a higher rate. It may also push some landlords into a higher tax bracket.
Section 24 was introduced by George Osborne, who was Chancellor of the Exchequer at the time, in an effort to cool down the buy-to-let property market by making the sector less profitable and helping ensure more housing stock was available to first time buyers.
I’m a Scottish landlord, do the rules on mortgage interest relief affect me?
Any UK landlord who has a mortgage on their property – including Scottish landlords – is affected by the law. The rules apply to accidental landlords as well property portfolio landlords and those in a partnership. However, Section 24 doesn’t apply to landlords who rent out property through a limited company as they pay corporation tax on their profits rather than personal income tax. Landlords with furnished holiday lets may also be exempt.
Which costs are subject to Section 24?
Mortgage interest is the main item covered by the rules but there are other costs related to having a property loan that you should consider. These include administration and arrangement fees for taking out your mortgage, as well as penalties for paying it off early. Interest on loans to refurbish your rental property could also be included.
How does Section 24 affect Glasgow landlords?
Section 24 affects landlords across the UK in pretty much the same way. Before the change in the law, landlords could deduct the mortgage interest they paid when calculating their tax bill.
Since Section 24 became fully operational, landlords must pay tax on all the income they receive, without making this deduction. They can claim back mortgage payments as a tax credit, but only at the basic rate of income tax, meaning that higher rate taxpayers are likely to be worse off than before the change and may also find themselves pushed into a higher tax bracket. It could also affect your eligibility for child benefit, child tax credits and student loan repayments.
What is different for Glasgow landlords is in the tax rates in Scotland aren’t the same as elsewhere in the UK. Landlords in Glasgow pay Scottish Income Tax to the Scottish Government. The tax also applies to wages, pensions and most other taxable income apart from dividends and saving income.
In the tax year 2022 to 2023 the income tax rates are:
|Band||Taxable income||Scottish tax rate|
|Personal Allowance||Up to £12,570||0%|
|Starter rate||£12,571 to £14,732||19%|
|Basic rate||£14,733 to £25,688||20%|
|Intermediate rate||£25,689 to £43,662||21%|
|Higher rate||£43,663 to £150,000||41%|
|Top rate||over £150,000||46%|
Is there anything I can do to offset Section 24?
There are a few ways of reducing the impact of Section 24 that you might wish to consider, however, we’d strongly recommend taking advice from an accountant or tax adviser first.
1. Rent property through a limited company
Limited property companies have become more popular among landlords since the change. However, you’re advised to do the sums first to make sure it works for you. For example, shifting your properties to a limited company may mean you need to pay Scottish land and buildings transaction tax, as well as other costs. Though you won’t pay income tax on your rental profits, you will need to pay corporation tax.
2. Switch from residential to commercial property
Section 24 doesn’t apply to commercial property, so you could think about a change of direction.
3. Transfer your rental properties to your spouse
If your property income is likely to push you into a higher tax band, you could consider transferring ownership of the rental to your spouse – as long as they pay the basic rate of tax or are below the threshold for paying tax at all.
4. Change the division of profits in a partnership
If you rent property through a partnership, and your partner is in a lower tax band, you could consider transferring a higher percentage of the profits to them. If you’re not already in a partnership you could bring a lower-earning relative into the business.
Alternatively, you could offset the tax bill by cutting costs elsewhere. If you’re able to remortgage you might be able to find a better, lower interest deal. But make sure you won’t be penalised for switching loans.
If you’ve got questions about any aspect of renting out property in Glasgow, talk to us. We’d be happy to help.