UK Buy-To-Let Landlords Tax Loophole

UK property investors are aware that their rental income is taxed along with their salary. Before the implementation of section 24 in 2020, landlords could deduct mortgage interest and associated set-up fees from their taxes. Is that still the case now?

Section 24

Introduced for all Landlords across the UK, section 24 completely changed how landlords calculated tax. If you own a Buy-to-let property, you are charged tax based on your overall rental return. This means you are taxed on the total amount the property generates, regardless of your mortgage bill, set-up fees or associated costs, such as management fees to your estate agencies or maintenance. It removes the landlord’s right to deduct costs when calculating tax liability.

People who are on the higher side of the tax band, 40%/45%, will see a higher proportion of their rental incomes vanish, even for those seeking their first buy-to-let property that may be on the standard rate of 20% tax may need to tread carefully since the rental incomes may push you up onto a higher level tax band.

Band Taxable income Tax rate

Personal Allowance up to £12,570 0%

Basic Rate £12,571 to £50,270 20%

Higher Rate £50,271 to £125,140 40%

Additional Rate Over £125,141 45%

One way to reduce your tax liability is to set up an ltd company purely to hold your property or properties, 2023/2024.

The majority of our investor clients purchase through the Ltd company avenue, set up themselves or use accountancy services. Landlords save more on rental incomes by paying less tax through this route, especially for those in the higher rate brackets. Instead of paying tax based on their personal income tax band they instead pay corporation tax.

Category Taxable income Tax rate

Small Profits up to £50,000 19%

Marginal Rate £50,001 to £250,000 26.5%

Main Rate £250,000+ 25%

You will notice from the graphs above the difference in tax liability. The other key element when using the Ltd structure means you are not included within the section 24 rule, which means your set-up costs and all associated running costs that come with your property are now tax deductible, highly rewarding for those Landlords who use the short-term letting model.

Main highlights:

  • Possibilities for inheritance tax benefits

  • Chances of raising more finance

  • Limited liability

  • Saving thousands of pounds to reinvest

  • More mortgage tax relief available

  • Competitive lenders market

Chris Smith

“ We do hope you found this brief write-up interesting and educational, it’s been the basic blueprint for our clients across our experience of dealing with property investment transactions. This structure may not suit all and we would always point you in the direction of you seeking advice through an accountant or financial advisor within the UK.”