The restriction of mortgage interest relief for landlords — known as Section 24 — is now fully in place and continues to catch many Kent landlords off guard. If you own buy-to-let property and have a mortgage, understanding how Section 24 affects your tax bill is essential.
What changed under Section 24?
Before April 2017, landlords could deduct the full cost of mortgage interest from rental income before calculating tax. The rules, phased in between 2017 and 2020, replaced this deduction with a 20% tax credit. The rules are now fully operational.
Why this hits higher-rate taxpayers harder
For a basic-rate taxpayer paying 20% income tax, the net effect is broadly the same as the old system. For a higher-rate taxpayer paying 40%, the impact is significant. A landlord with £20,000 rental income and £12,000 mortgage interest now calculates profit on the full £20,000, receiving a 20% credit of £2,400 — but paying 40% tax on the higher profit figure.
The impact on your tax bracket
A further complication is that Section 24 can push landlords into a higher tax bracket even if their actual net income has not increased. If rental income is added to your other income before the mortgage interest deduction, you may be paying 40% tax on income that, in real terms, is modest.
Planning strategies for Kent landlords
- Transferring property into joint ownership with a spouse or civil partner who pays a lower tax rate
- Incorporating the rental portfolio into a limited company (involves significant legal and tax considerations)
- Using pension contributions to reduce your adjusted net income
- Reviewing whether selling some properties and reducing mortgage debt makes financial sense
None of these strategies is right for everyone, and some involve significant transaction costs. Professional advice is essential before making any structural changes.
Talk to us about your situation
Our chartered accountants work with small businesses, landlords and contractors across Surrey, Kent and Sussex. Get in touch for a free initial consultation.
