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.
## Can Portfolio Landlords Reduce Their Tax Bill Without Incorporating or Selling?
Yes, portfolio landlords can employ several legitimate strategies to mitigate the effects of Section 24 on their tax bill, even without resorting to selling properties or incorporating their portfolio. Since April 2020, mortgage interest is no longer deductible for individual landlords, instead replaced by a basic rate tax credit equivalent to 20% of finance costs. This change primarily impacts higher and additional rate taxpayers, as it increases their taxable rental income before the credit is applied, pushing more of their profits into higher tax brackets.
Understanding the nuances of Section 24 is critical. For example, a higher rate taxpayer with £30,000 in rental income and £15,000 in mortgage interest payments would historically deduct the interest, paying tax on £15,000. Now, they pay tax on the full £30,000, then receive a £3,000 tax credit (20% of £15,000). This effectively means they pay 40% on the £15,000 notional profit, minus the 20% credit, resulting in a higher effective tax burden than before. The aim is to restructure how income is generated or owned, rather than disposing of assets or changing business structure entirely.
## Tax-Efficient Strategies for Individual Landlords
### Diversifying into Commercial Property or Mixed-Use Assets
Investing in commercial property or mixed-use properties (e.g., a flat above a shop) can offer a significant advantage because Section 24 specifically applies to residential finance costs. Commercial property finance costs remain fully tax-deductible against commercial rental income. This means landlords can offset their entire mortgage interest against their rental profits for commercial units, reducing their taxable income directly.
For example, if a landlord purchases a commercial unit for £400,000 with a £250,000 mortgage, generating £2,000 per month in rent and incurring £1,000 per month in interest, they can deduct the full £1,000 interest from the £2,000 rent. This leaves £1,000 taxable profit, as opposed to a residential property where the £1,000 interest would only generate a 20% credit. Furthermore, Stamp Duty Land Tax (SDLT) on commercial property is generally lower than for residential, with 0% on the first £150,000, 2% on £150,000-£250,000, and 5% above £250,000. Mixed-use properties also benefit from the commercial SDLT rates, making them an attractive option for some investors.
### Joint Ownership or Spouse Transfer for Income Shifting
For married couples or civil partners, income shifting can be a powerful tool. If one spouse is a basic rate taxpayer (earning under the higher rate threshold) and the other is a higher or additional rate taxpayer, transferring a greater proportion of the property ownership to the lower-earning spouse can reduce the overall household tax bill. The rental income and associated Section 24 credit will then be allocated according to ownership percentages. For a property owned 50/50, if one partner is a higher rate taxpayer and the other a basic rate taxpayer, the basic rate taxpayer's share of profit will be taxed at 22% (from April 2027), while the higher rate taxpayer's share is taxed at 42%. By transferring 100% of ownership to the basic rate taxpayer, all profit is taxed at the lower rate, assuming they remain within that tax band. This does not trigger Capital Gains Tax (CGT) between spouses. However, Stamp Duty Land Tax (SDLT) implications should be considered if the transfer involves cash or mortgage assumption, although often a 'transfer of equity' can be structured without SDLT if no money changes hands.
### Operating as a Furnished Holiday Let (FHL)
Furnished Holiday Lets are treated differently for tax purposes than standard residential buy-to-let properties. Provided the property meets specific occupancy conditions (available for letting for 210 days in the tax year, and actually let for 105 days, among other rules), it qualifies as a trade. This allows landlords to deduct 100% of their mortgage interest and other finance costs against their rental income, bypassing Section 24 entirely. FHLs also benefit from Capital Gains Tax reliefs such as Business Asset Rollover Relief and Gift Hold-Over Relief, which are not available to standard buy-to-lets. Furthermore, contributions to pensions can be made from FHL profits, as they are considered 'relevant earnings'. The main drawback is the increased management intensity and potential for higher void periods compared to long-term ASTs.
### Employing a Rent-to-Rent Model
While not directly mitigating Section 24 on a property you own, the Rent-to-Rent strategy allows landlords to earn income from property without owning it, thus incurring no mortgage finance costs. In a Rent-to-Rent agreement, an investor rents a property from an owner and then sublets it, often as an HMO or serviced accommodation. The income generated from the subletting is then offset by the rent paid to the owner and other operating expenses. Since the Rent-to-Rent operator does not hold a mortgage on the property, Section 24 is not applicable to their income stream. This model offers high returns on low capital outlay but requires significant management and sourcing skills.
### Capital Allowance Claims
For properties that qualify, particularly furnished holiday lets or properties with commercial elements, claiming capital allowances on integral features and certain fixtures can reduce taxable profits. Capital allowances permit landlords to deduct the cost of certain items from their taxable profits. This can include items like heating systems, electrical installations, and specific fittings within a property. This directly reduces the taxable profit figure, effectively lowering the overall tax bill. An example might be replacing a boiler for £3,000 in an FHL; this £3,000 could be fully deductible against income, reducing the tax liability, whereas for a standard BTL it would only form part of the 20% credit calculation against the overall finance costs.
## Investor Rule of Thumb
Careful planning and a thorough understanding of tax implications are paramount; neglecting to review your property structure or income streams can lead to substantially higher tax liabilities under Section 24.
## What This Means For You
Understanding these strategies is not just about avoiding tax, but about optimising your portfolio's profitability within the current regulatory framework. Most landlords don't lose money because they misunderstand Section 24, they lose money because they fail to adapt their strategy. If you want to know which of these mitigation strategies could work for your specific portfolio, this is exactly what we analyse inside Property Legacy Education. We look at your individual circumstances and help you build a strategy to maximise your returns in the current climate.
## Common Pitfalls to Avoid When Mitigating Section 24
When trying to reduce the impact of Section 24, it's easy to fall into traps that can either be ineffective or lead to unintended tax consequences. Avoid making significant changes without seeking professional advice, as incorrect restructuring could trigger unforeseen Stamp Duty Land Tax or Capital Gains Tax events. Do not simply assume all mixed-use properties offer a tax advantage without due diligence, as the commercial element must be genuine and significant to qualify for commercial SDLT rates. Be wary of transferring property to a spouse if there's a risk of the recipient spouse becoming a higher rate taxpayer in the near future. Ensure any Furnished Holiday Let meets all the strict HMRC conditions to qualify for the favourable tax treatment, as failing to do so will result in it being treated as a standard buy-to-let. Lastly, avoid any aggressive tax avoidance schemes that promise unrealistic returns, as these are frequently challenged by HMRC and can lead to severe penalties.
Steven's Take
The changes introduced by Section 24 have fundamentally altered the landscape for individual landlords in the UK. Many of my students, including myself, have had to adapt our strategies to maintain profitability. The key is to recognise that the government’s intent was to disincentivise individual ownership of residential buy-to-let, pushing towards corporate structures or alternative property types. However, selling up or incorporating isn't the only answer. Exploring options like joint ownership with a lower-earning spouse, diversifying into commercial or mixed-use assets, or even pivoting to Furnished Holiday Lets, can provide legitimate and effective routes to reduce your taxable income. For instance, my own portfolio includes commercial assets which remain unaffected by Section 24. It requires careful planning and often professional advice, but these strategies can help maintain the viability of your property business.
What You Can Do Next
Review your current portfolio: Identify which properties are most affected by Section 24 and calculate the additional tax burden using a professional tax calculator or an accountant's advice.
Consult a tax advisor: Speak with a qualified property tax specialist to assess the suitability of strategies like spouse transfers or FHL conversions for your specific financial situation and risk profile. They can help you understand the full implications, including potential SDLT or CGT on transfers.
Research local council policies: If considering a Furnished Holiday Let, check local council planning regulations and any potential restrictions or licensing requirements for short-term lets in your area via your local council's website.
Evaluate commercial property opportunities: Research the commercial property market in your target areas, paying attention to tenant demand, yields, and potential finance options. Look for mixed-use assets on commercial property listing sites.
Check your spouse's income tax band: If considering income shifting, verify your spouse's current and projected income levels to confirm they will remain within a lower tax bracket, potentially by checking HMRC's tax code guidance on gov.uk.
Understand FHL criteria: Familiarise yourself with the detailed HMRC conditions for Furnished Holiday Lets at gov.uk/furnished-holiday-lettings-rules to ensure any property you convert will genuinely qualify.
Assess Rent-to-Rent viability: If considering a Rent-to-Rent model, thoroughly research local rental demand for HMOs or serviced accommodation, and connect with experienced Rent-to-Rent operators to understand the operational complexities.
Get Expert Coaching
Ready to take action on tax & accounting? Join Steven Potter's Property Freedom Framework for comprehensive, hands-on property investment coaching.