Mortgage Interest Relief Restriction: Section 24 in Practice
Mortgage Interest Relief Restriction: Section 24 in Practice
Background: Why the Rule Exists
Before April 2017, UK residential landlords could deduct the full amount of mortgage interest from their rental income when calculating taxable profit.
For a higher‑rate taxpayer that meant a 40 % tax saving on every pound of interest paid.
The Government considered this an unfair tax advantage that encouraged buy‑to‑let speculation and pushed house prices up in certain markets.
Section 24 of the Finance Act 2015 was introduced to restrict the relief, effectively cutting the tax‑deductible portion of mortgage interest to a basic‑rate 20 % credit.
The change was phased in over four tax years, finally reaching the full restriction from 2020‑21 onwards.
Who Is Affected?
The restriction applies to any individual who receives rental income from a residential property in the UK, including furnished holiday lets, and who is resident for tax purposes.
It does not matter whether the mortgage is on a single property or a portfolio; the rule is applied on a per‑landlord basis.
Partnerships and trusts that let dwellings are also caught, but limited companies (including those formed as “property‑SPVs”) are exempt, because they can still treat interest as a normal business expense.
If you are a basic‑rate taxpayer the impact is modest, but higher‑rate (40 %) and additional‑rate (45 %) taxpayers see a significant increase in their tax bill.
The Phased Roll‑out (2017‑2020)
The legislation introduced a transitional period to give landlords time to adjust.
The table below shows how the deductible proportion of mortgage interest changed and the corresponding tax‑credit percentage that replaced it.
|
Tax Year |
% of Interest Deductible |
% of Interest Given as 20 % Credit |
|---|---|---|
|
2017‑18 |
25 % |
75 % |
|
2018‑19 |
50 % |
50 % |
|
2019‑20 |
75 % |
25 % |
|
2020‑21 onwards |
0 % |
100 % |
How the 20 % Tax Credit Works in Practice
From 2020‑21 onward, you can no longer subtract mortgage interest from your rental income when calculating your taxable profit.
Instead, the full amount of interest is taken off your tax liability as a 20 % credit.
For a landlord with £10,000 of mortgage interest in a tax year, the credit is £2,000 (£10,000 × 20 %).
This amount is entered on the “Tax taken off” section of your Self Assessment return and is offset against your overall tax bill.
If you have no other tax liability, the credit cannot create a repayment; it is simply lost.
Higher‑rate taxpayers therefore effectively pay an extra 20 % of their interest as tax compared with the old rules.
Calculating Your Tax Under Section 24
To see the impact, suppose you have rental income of £18,000, allowable expenses (excluding interest) of £4,000 and mortgage interest of £8,000.
Under the old rules you would deduct £8,000 interest, leaving £6,000 taxable profit.
At 40 % you would owe £2,400.
Under Section 24 you first calculate profit before interest: £18,000 – £4,000 = £14,000.
The whole £14,000 is taxable, giving a tax bill of £5,600 (40 % of £14,000).
You then receive a 20 % credit on the £8,000 interest, i.e., £1,600, which reduces the bill to £4,000.
The net extra cost compared with the old regime is £1,600, exactly the difference between the 40 % relief you previously enjoyed and the 20 % credit now allowed.
Key Thresholds and Allowances
The restriction does not have a monetary threshold; it applies to the first pound of interest on any residential mortgage.
However, the “property income allowance” (PIA) of £1,000 can be claimed instead of actual expenses, but you cannot then claim mortgage‑interest relief.
The personal allowance (£12,570 for 2023‑24) remains unchanged and is set against your total income, including rental profit.
The “wear‑and‑tear allowance” (10 % of rent for furnished lets) is still available, but it cannot be used to offset interest.
The “renewals allowance” for replacement of domestic items was abolished for new claims from April 2015.
Filing Your Return: Forms and Deadlines
All residential rental income must be reported on the Property Income pages (SA106) of your Self Assessment tax return.
The mortgage‑interest credit is entered on the “Tax taken off” line of the SA100 main page, referencing the amount from SA106.
If you receive the credit through your tax code (the “automatic coding‑in” system), HMRC will adjust your PAYE code accordingly, usually from the following tax year.
The filing deadline for online returns is 31 January following the end of the tax year; paper returns must arrive by 31 October.
Late filing attracts a penalty of £100, rising to £1,600 for delays over three months.
Tip: If your only rental property is a single let that you manage yourself, you can still use the “property income allowance” (£1,000) and ignore mortgage‑interest calculations altogether, provided you have no other allowable expenses.
This can simplify your return and avoid the extra computation, but only if the allowance exceeds your actual costs.
Mitigation Strategies
Transferring to a Limited Company
One of the most effective ways to sidestep Section 24 is to transfer ownership of the property(ies) to a limited company.
Companies can still deduct mortgage interest as a business expense, and corporation tax on rental profits is a flat 25 % (from April 2023) for profits above £250,000, with a small‑profits rate of 19 % for companies with profits up to £50,000.
However, moving assets triggers a Capital Gains Tax event at the market value of the property, and SDLT may be payable on the transfer.
The upfront tax cost must be weighed against the long‑term saving from full interest relief.
Using a Different Finance Structure
If you prefer to stay as an individual, consider an “offset mortgage” where the interest is calculated on the net balance (deposits offset against the loan).
The interest portion remains subject to Section 24, but offset accounts can reduce the overall interest payable, thereby limiting the amount that is capped at 20 % credit.
Similarly, an “interest‑only” mortgage with a lower interest rate may lower the absolute amount of restricted interest.
Optimising Rent and Expenses
Because the restriction applies to the gross amount of interest, any increase in rental income will be taxed at your marginal rate without any offset from interest.
Review your rental pricing regularly to ensure it covers the post‑tax cost of borrowing.
Also maximise allowable deductions such as property management fees, insurance, maintenance and the wear‑and‑tear allowance (where applicable).
Every pound of expense that is not interest reduces your taxable profit and partially offsets the loss of the higher‑rate deduction.