A report from Propertymark has laid out the stark and in some cases unforeseen consequence of the Conservative government’s phased removal of mortgage interest rate relief under Section 24 of the Finance (No2) Act 2015.

As most agents and landlords will know, the change was phased in from April 2017 over four years – the aim, according to former Chancellor George Osborne, was “to make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment.”

However, the well-researched report from Propertymark says that in reality Section 24 has had far wider-ranging consequences.

It says: “The measure pushed some landlords into higher tax bandings and has reduced the financial viability of existing investments, with many reporting breaking even or being in loss-making positions. In some cases, landlords appear able to withstand the financial impact, whereas others have much lower levels of financial resilience. 

“As a result of the measure, those in the latter category have seen their living standards compromised, have struggled to pay bills, and in some cases, appear to be in a precarious financial position.”

Propertymark accepts that other factors have exacerbated the situation – the rapid rise in mortgage interest rates and the cost-of-living crisis, plus other tax and regulatory changes. 

But in total Section 24 has obliged many landlords to adopt alternative financial strategies, which have sometimes been detrimental to the health of the private rental sector. 

Propertymark says: “Incorporation has been popular, but this process and the ongoing administrative requirements necessitated by owning a limited company pose their financial and resource implications. Many landlords’ rent increases had already done so to address not only their increased tax liability but also increased business costs. Implications for tenants already facing a broader cost-of-living crisis are clear. 

“Maintenance budgets have also been reduced, often unintentionally because of reduced cash flows. The implications here are stark. For the landlords, there is a risk that a lack of maintenance could impact upon the saleability and rentability  of properties. There is also the prospect of small, relatively minor unattended repairs, becoming large and costly repairs in the future, as well as the potential for dangerous conditions to arise.”

The report says that tenants are seeing “suboptimal conditions” with fewer landlords able to afford energy efficiency improvements and in some cases landlords quitting the sector completely – with some of the properties sold off ending up owner-occupied and thus reducing the rental stock, with inevitable consequences for rent levels. 

Adding the Section 24 penalties to concerns over legislation, Propertymark says: “Whilst an ageing landlord cohort, concerns about the Renters (Reform) Bill (Watson, 2024), and the availability of better investments (lower risk and higher return) elsewhere are undoubtedly contributing to the mix, Section 24 is a key decision-making factor for buy-to-let landlords. 

“In a further blow to the sector, some landlords have reneged on plans to expand their portfolio and others have chosen to relocate their properties to other markets. The net effect is a reduction in properties.  It is clear the repercussions of Section 24, including the reduction in supply and increased rents, will resonate throughout the sector for some time.”

You can read the full report here.