The recent changes to mortgage interest tax relief under Section 24 have rightly caused outrage among small buy-to-let landlords. While the stated aim was to level the playing field between large incorporated landlords and small individual investors, the actual effect has been the opposite. Large landlords now enjoy significant tax advantages, while small landlords face unfair penalties. Playing a significant role in causing the Housing and more specifically rental crisis.
Under Section 24, landlords can no longer deduct mortgage interest payments from rental income before calculating tax. Instead, a landlord receives a basic rate (20%) tax credit based on their interest payments. This means higher rate taxpayers now pay significantly more tax on their rental income. A huge blow for small landlords just trying to supplement their pension.
Yet incorporated landlords (ie companies) can still deduct mortgage interest when calculating taxable profits. So large corporate landlords pay far less tax than a small landlord with just one or two properties. Hardly a fair system.
And the recent jump in interest rates has magnified the pain for small landlords. Back in 2021, base rates were just 0.1%. But now the Bank of England base rate is a whopping 5.25%. Interest costs have skyrocketed, but landlords get scarcely any additional tax relief.
Many small landlords are now making an annual loss on their buy-to-lets after mortgage interest and other costs. But they still face a hefty tax bill thanks to Section 24. This simply isn’t sustainable or fair.
No wonder so many small landlords are being forced to sell up. Yet this reduces supply and pushes up rents. Hardly helpful when we face a housing crisis.
There are also serious concerns that Section 24 may actually reduce tax revenues in the long run. If small landlords are replaced by large corporate entities based overseas, far less tax will be collected on rental income.
What’s the solution? Section 24 needs to be urgently reviewed and reformed. Interest deductions should be fully restored for small individual landlords, at least for their first 1 or 2 properties. This would rebalance the system and prevent small landlords from being taxed into oblivion.
The government also needs to take action on the drastic increase in interest rates. Steps should be taken to ease the pressure on small landlords until base rates return to more normal levels. There are ways to help without fuelling inflation.
Landlords provide an invaluable service by supplying much needed rental housing, often to some of the most vulnerable tenants. They should not be seen as an easy target for unfair taxes.
A thriving private rental sector requires both large and small landlords. Section 24 has tilted the field sharply in favour of big business. If left unchanged, it will lead to reduced supply, higher rents and ultimately less tax revenue.
There is still time to avoid disaster. But the government must act now to reform Section 24 before the buy-to-let exodus gathers pace. Only by creating a fair tax system can we balance the rental market and protect the interests of both landlords and tenants.