What legitimate strategies can existing portfolio landlords use to mitigate the effects of Section 24 on their tax bill, short of selling properties or incorporating?
Quick Answer
As an individual landlord, you can't deduct mortgage interest from rental income. Mitigate Section 24 by optimising expenses, increasing rents, and making strategic use of allowances, but full relief requires incorporation or selling.
## Smart Strategies for Portfolio Landlords to Soften Section 24's Bite
Section 24 has fundamentally reshaped the tax landscape for individual landlords in the UK, making mortgage interest no longer a deductible expense against rental income since April 2020. This means many landlords now pay tax on their gross rental income, then receive a 20% tax credit on their finance costs. For higher and additional rate taxpayers, this credit often doesn't cover the tax increase, leading to a significant profit squeeze. However, there are legitimate strategies outside of selling up or incorporating that existing portfolio landlords can explore to mitigate this impact.
### Maximising Allowable Expenses and Optimising Structures
* **Rigorously Reviewing and Claiming All Allowable Expenses**: Many landlords overlook legitimate expenses that can reduce their taxable rental income. This isn't about fabricating claims, but ensuring every penny spent on the property and its running is accounted for. This includes **letting agent fees**, **legal fees for renewals or evictions**, **accountancy fees**, **insurance premiums**, **repair and maintenance costs** (not improvements), **council tax and utility bills** (when vacant or included in rent), and even **travel expenses** for property visits. For example, if you pay an accountant £500 a year for your property accounts, that's £500 less income subject to tax.
* **Leveraging Capital Allowances for Furnished Properties**: If you let out furnished properties, you can claim capital allowances on specific items. While the old 'wear and tear allowance' is gone, landlords can still claim for items like **furniture, appliances, and fixtures**. This can offer a tax reduction in the year the items are purchased. It's crucial to distinguish between repairs (revenue expenditure, fully deductible) and improvements (capital expenditure, potentially eligible for capital allowances but not a direct income deduction). Understanding this difference is key to legitimate expense claiming.
* **Transferring High-Income Spouses' Interest to a Lower-Income Spouse**: If one spouse has a significantly lower income, or even no income, transferring a portion or all of the beneficial ownership of a jointly held property (or properties) can be highly effective. This needs to be done formally, typically through a **declaration of trust or a deed of assignment**, and requires careful legal and tax advice. If you transfer, say, 50% of the beneficial ownership from a higher-rate taxpayer spouse to a basic-rate taxpayer spouse, the income from that 50% will then be taxed at the basic rate of 20% instead of 40% or 45%, significantly reducing the overall tax burden on the rental profits. Remember, the Stamp Duty Land Tax (SDLT) implications need to be considered when transferring beneficial ownership above certain thresholds, though usually, transfers between spouses are exempt if there's no money exchanged (an 'assumed' market value may still apply for CGT purposes). However, be aware that if the transfer is for capital value, this could trigger Capital Gains Tax, which for residential property is 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers on gains above the £3,000 annual exempt amount.
* **Utilising All Tax Reliefs and Allowances**: Beyond basic expenses, ensure you are using your full **personal income tax allowance** (£12,570 for most people in 2025/26), and if eligible, the **property income allowance** (£1,000 for income below £1,000, or a choice for income between £1,000 and £2,500). While these might seem small, every bit helps in chipping away at your taxable income.
### Strategic Investment and Property Utilisation
* **Exploring Furnished Holiday Lets (FHLs)**: FHLs are treated differently for tax purposes than standard buy-to-let properties. They qualify for tax advantages, including **full deduction of mortgage interest**, **capital allowances on furniture and fixtures**, and potentially being treated as a business for **Capital Gains Tax reliefs** (such as Business Asset Rollover Relief or Gift Relief) and even for **pension contributions**. The property must meet strict conditions regarding availability, letting (105 days per year), and occupancy to qualify. For instance, if you convert a BTL property generating £20,000 rental income with £10,000 in mortgage interest, as a regular BTL, you'd pay tax on £20,000 before the 20% interest credit. As an FHL, you'd pay tax on £10,000 (after deducting the interest), a significant difference for a higher rate taxpayer.
* **Considering Commercial Property Investment**: Commercial properties (offices, retail units, warehouses etc.) are generally not subject to Section 24. While property values and yields can differ, the ability to **fully deduct mortgage interest** against rental income can make them an attractive option. This requires a different set of expertise, due diligence, and often higher capital requirements than residential property, but it entirely bypasses the Section 24 problem.
* **Investing in Houses in Multiple Occupation (HMOs)**: While still residential property, HMOs often generate significantly higher gross rental yields compared to single-let properties. This increased revenue can help offset the reduced profitability caused by Section 24, as the higher gross income provides a larger buffer before tax becomes problematic. HMOs do come with more stringent **licensing requirements** (mandatory for properties with 5+ occupants forming 2+ households) and higher management intensity, but the stronger cash flow can be a powerful mitigant.
* **Focusing on Capital Growth Over Pure Yield**: While yields are important, Section 24 encourages a shift in focus. By prioritising properties with strong capital appreciation potential, landlords can aim for tax-efficient gains. Capital Gains Tax on residential property is 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers, after the annual exempt amount of £3,000. While still a tax, it's generally triggered on disposal, giving more control over when it's paid, and may be less impactful than an ongoing hit to annual income.
### Operational Efficiencies and Financial Restructuring
* **Optimising Mortgage Structures**: While Section 24 disallows interest deductions, it doesn't mean you shouldn't aim for the lowest interest rates possible. Regularly reviewing your **mortgage deals** to secure the most competitive rates (currently BTL rates are 5.0-6.5% for 2-year fixed, and 5.5-6.0% for 5-year fixed) can directly improve your net cash flow. Consider longer fixed-rate products to gain certainty on outgoings, though remember standard BTL stress tests require 125% rental coverage at a 5.5% notional rate.
* **Refinancing for Capital Release for Other Investments**: If a substantial amount of equity is tied up in properties, consider refinancing to release capital. This capital could then be used for other investments that are not subject to Section 24 restrictions, or to pay down higher interest debt elsewhere. However, remember any additional borrowing on existing BTL properties will still be subject to Section 24.
* **Increasing Rents Strategically**: While never popular with tenants, justified rent increases are a fundamental part of managing a property business. Ensuring your rents are at **market rate** allows you to maximise your gross income, thereby providing more headroom after all other costs and tax credits are applied. The upcoming Renters' Rights Bill, expected in 2025, may impact rent increase mechanisms, so staying informed is crucial.
### Investor Rule of Thumb
The most effective mitigation of Section 24 involves a proactive and detailed understanding of your property business finances, leveraging every legitimate deduction, and continually assessing if your ownership structure and property type remains optimal for your individual tax position.
### What This Means For You
Section 24 isn't going anywhere, so burying your head in the sand is not an option for smart landlords. These strategies demonstrate that there are ways to adapt and thrive, even with changing tax rules. Most landlords don't lose money because they ignore tax, they lose money because they ignore legitimate ways to reduce it without professional guidance. If you want to know which nuanced strategies and structuring approaches are best for your specific portfolio, this is exactly what we analyse inside Property Legacy Education, helping you build and protect your wealth for the long term.
Steven's Take
The impact of Section 24 has been a game-changer for many individual landlords, pushing some out of the market and forcing others to rethink their entire strategy. What I've seen consistently is that those who adapt and get smart with their books are the ones who continue to build their legacy. It's not just about finding more income, it's about being incredibly meticulous with your expenses and understanding every legal avenue available. Don't assume your current setup is the best, especially if your personal tax situation has changed. Review your entire operation, from joint ownership possibilities to niche investments like FHLs, because inertia is often the biggest killer of profitability in a changing regulatory landscape. The time to act and optimise is now.
What You Can Do Next
Conduct a full review of all your property related expenses over the last 12-24 months to identify any missed deductions, categorising them correctly as revenue (deductible) or capital (potential allowances).
Consult with a specialist property tax advisor to discuss the feasibility and implications of transferring beneficial ownership of properties to a lower-income spouse, including any potential SDLT or CGT considerations.
Evaluate your portfolio's eligibility and potential returns for conversion to Furnished Holiday Lets (FHLs) if current properties meet or could meet the specific FHL criteria (availability, letting, occupancy).
Research the commercial property market in your target areas to understand yields, capital values, and financing requirements as a potential diversification strategy to bypass Section 24 entirely.
Actively review your Buy-to-Let mortgage rates every 12-18 months, even on fixed terms, to ensure you are securing the most competitive deals against the Bank of England base rate (currently 4.75%) and typical BTL rates (5.0-6.5%).
Develop a strategic rent review policy for your portfolio, ensuring rents are regularly adjusted to reflect market values without alienating tenants, keeping an eye on upcoming Renters' Rights Bill implications.
Explore the potential for capital allowances on any new furniture, fixtures, or equipment purchased for your furnished residential lets, ensuring compliant record-keeping to claim these legitimately.
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