Section 24 Explained: Navigating Mortgage Interest Tax Relief Changes

andlords in the UK.

It altered the way finance costs are treated for tax, and for many landlords it increased taxable profits even where real cash profit stayed the same or fell.

The result has been a persistent source of confusion: some landlords still expect mortgage interest to reduce rental profit in the old way, while others know relief has changed but are not clear on how the 20% tax credit actually works in practice.

If you own rental property personally, Section 24 can affect your tax bill, your cash flow, your tax band, and even your entitlement to certain allowances or charges.

It can also influence whether keeping a property in your own name still makes sense.

The detail matters because the tax position can look manageable on paper but become uncomfortable once mortgage rates rise.

This guide explains what Section 24 is, who it affects, how the tax calculation works, and what practical steps UK landlords can take to plan around it sensibly.

What Section 24 actually changed

Before the rules changed, an individual landlord could usually deduct mortgage interest and other finance costs from rental income before arriving at taxable rental profit.

If rent was £15,000 and mortgage interest was £8,000, taxable profit would broadly be £7,000, less any other allowable expenses.

Section 24 changed that treatment for most residential property held by individuals and partnerships.

The restriction was phased in from April 2017 and has applied in full since the 2020/21 tax year.

Now, qualifying finance costs are not deducted in full when calculating rental profit for income tax purposes.

Instead:

• Rental income is added up

• Allowable expenses other than restricted finance costs are deducted

• The remaining figure becomes taxable rental profit

• A tax reduction equal to 20% of qualifying finance costs is then given, subject to limits

That distinction is crucial.

The taxable profit figure can be much higher than the landlord's real economic profit after mortgage interest.

For higher-rate and additional-rate taxpayers, that often means a larger tax bill than under the old system.

Who Section 24 applies to

Section 24 mainly affects individual landlords with residential property finance costs.

It also applies to many partnerships that hold residential lets, unless the partnership is a limited liability partnership or the property is held through a company structure.

It generally applies to:

• Buy-to-let properties owned in personal names

• Residential property let on standard assured shorthold tenancies

• Properties with repayment or interest-only borrowing

• Loans used to buy, improve or refinance qualifying residential lets, up to the value limit rules that broadly link borrowing to business purposes

It does not generally apply in the same way to:

• Property held in a limited company

• Furnished holiday lets that qualify under the FHL rules for the relevant tax year

• Some commercial property businesses

That difference explains why incorporation became such a prominent topic after the change.

But incorporation is not automatically the right answer; there are tax and legal costs, mortgage issues, stamp duty land tax implications, and capital gains considerations that need careful review.

What counts as finance costs

The restricted costs are wider than many landlords realise.

They do not only include mortgage interest.

Broadly, qualifying finance costs can include:

• Interest on mortgages, loans and overdrafts used for the residential property business

• Arrangement fees and certain loan-related charges

• Mortgage broker fees connected to finance

• Alternative finance payments treated similarly to interest

By contrast, repayment of the mortgage principal is not an allowable revenue expense at all.

That was true before Section 24 and remains true now.

Some landlords still confuse capital repayment with interest relief; HMRC does not allow a deduction for repaying the loan itself.

How the new calculation works in practice

The easiest way to understand Section 24 is to compare old and new treatment.

Under the old treatment, the landlord paid tax on £6,000.

Under Section 24, the landlord pays tax on £15,000 and then receives a reduction worth 20% of the £9,000 mortgage interest, which is £1,800.

If that landlord is a basic-rate taxpayer throughout, the final result may in some cases be similar to the old system.

But if the landlord is a higher-rate taxpayer, or the larger taxable profit pushes them into higher-rate tax, the difference becomes much more painful.

Why higher-rate taxpayers are hit harder

The core issue is simple: relief is given at 20%, even if the landlord pays income tax at 40% or 45%.

Suppose a landlord has £20,000 of rental income, £4,000 of non-finance expenses and £10,000 of mortgage interest.

Under old rules, taxable profit would have been £6,000.

Under Section 24, taxable profit becomes £16,000, with a tax credit of £2,000.

If the landlord pays tax at 40%, the tax on £16,000 is £6,400.

After the £2,000 reduction, the tax bill is £4,400.

Under the old rules, 40% of £6,000 would have been £2,400.

That is a £2,000 increase in tax for exactly the same real cash position.

This is why many geared landlords saw profits for tax rise sharply while actual post-interest surplus did not.

The hidden knock-on effects beyond the tax bill

Section 24 is often discussed only as a mortgage interest issue, but its wider effects can be just as significant.

Because taxable income rises, it can affect:

• Whether you move into a higher or additional rate tax band

• The tapered loss of your personal allowance once adjusted net income exceeds £100,000

• High Income Child Benefit Charge exposure

• Student loan repayments

• The effective rate of tax on other income

In other words, the cost of Section 24 can be more than the direct difference between old and new rental tax treatment.

It can spill into other parts of your personal tax position.

For many landlords, the real shock was not simply "less relief on mortgage interest".

It was finding that taxable income rose enough to trigger higher-rate tax or other charges, even though the business had not become more profitable in cash terms.

A worked UK example: basic-rate versus higher-rate landlord

Take two landlords, both with the same property figures:

• Gross annual rent: £24,000

• Letting agent fees, repairs, insurance and other allowable costs: £4,000

• Mortgage interest: £12,000

Their economic profit before tax is £8,000.

Landlord A has low other income and remains a basic-rate taxpayer.

Landlord B has employment income that already places them in higher-rate tax.

Under Section 24, both landlords calculate taxable rental profit as £20,000, because the mortgage interest is not deducted at this stage.

Landlord A pays income tax at 20% on £20,000, which is £4,000.

They then receive a tax reduction of £2,400, being 20% of the £12,000 interest.

Final tax attributable to the rental profit is £1,600.

That broadly mirrors 20% tax on the true profit of £8,000.

Landlord B pays income tax at 40% on £20,000, which is £8,000.

They also receive the same £2,400 tax reduction.

Final tax is £5,600.

That is far higher than 40% of the true profit of £8,000, which would have been £3,200 under the old approach.

Same property.

Same rent.

Same mortgage.

Very different tax outcome.

The tax reduction limits landlords often miss

The 20% tax reduction is not always as straightforward as "20% of interest paid".

There are limits.

Broadly, the reducer is limited to the lower of:

• Your finance costs for the year, plus any disallowed amount brought forward

• The profits of the property business in the year

• Your adjusted total income exceeding your personal allowance

If the reduction cannot be used in full, the unused finance costs may usually be carried forward to a later tax year.

This tends to matter where rents are low relative to interest, or where other circumstances mean current-year tax capacity is restricted.

Landlords with thin margins should not assume that the full 20% relief always lands in the same year the interest is paid.

What Section 24 means for low-profit and highly geared properties

The more debt a property carries, the greater the Section 24 pressure.

A lightly mortgaged property may still produce a comfortable post-tax surplus.

A highly geared property, especially one refinanced at higher rates, may produce a very different picture.

Consider a landlord receiving £1,500 a month in rent, paying £950 a month in mortgage interest and another £250 a month in other running costs.

The annual figures are:

• Rent: £18,000

• Other costs: £3,000

• Mortgage interest: £11,400

• Real cash profit before tax: £3,600

Taxable rental profit under Section 24 is £15,000.

A higher-rate taxpayer would face tax of £6,000 on that figure, less a reducer of £2,280, leaving £3,720 tax.

That exceeds the property's actual cash profit of £3,600.

That is an extreme but very real outcome in some cases.

The landlord may effectively need to subsidise the property from other income just to pay the tax.

Properties owned jointly: can ownership shares help?

For married couples and civil partners, ownership structure can affect how painful Section 24 becomes.

If one spouse is a basic-rate taxpayer and the other is higher-rate, sharing income differently can sometimes reduce overall tax.

But this area needs care.

By default, income from property held jointly by spouses or civil partners is generally taxed 50:50, regardless of beneficial ownership, unless a valid Form 17 election is made and genuine unequal beneficial interests exist.

Simply deciding to "allocate" more profit to the lower earner without changing the underlying ownership will not do.

For unmarried co-owners, the tax treatment generally follows actual beneficial ownership more directly.

Changing ownership can create legal, mortgage and stamp duty land tax consequences.

The tax saving should be weighed against those costs and any future capital gains position.

Should you move properties into a limited company?

Section 24 is one reason many landlords consider incorporation.

A limited company can generally deduct mortgage interest in full when calculating its profits for corporation tax purposes.

That can look attractive, especially for higher-rate taxpayers with significant borrowing.

But the decision is rarely simple.

A transfer of personally owned property into a company is usually treated as a sale at market value for tax purposes.

That can trigger:

• Capital gains tax

• Stamp duty land tax for the company, potentially including the higher rates

• Mortgage refinancing costs or availability problems

• Legal and accountancy fees

• A different tax profile when extracting money from the company

There are limited circumstances in which incorporation relief or partnership-based planning may help, but this is technical and often over-sold.

Many landlords do not qualify for the more favourable outcomes they have heard about online.

The right question is not "Can a company avoid Section 24?" but "After transfer costs, borrowing terms, corporation tax, dividend tax and long-term plans, does a company improve my position enough to justify the change?"

What landlords can still claim in full

Section 24 has caused some landlords to become overly cautious and underclaim valid expenses.

The restriction applies to qualifying finance costs, not to ordinary running costs of the rental business.

You can still usually deduct allowable revenue expenses such as:

• Letting agent and management fees

• Landlord insurance

• Repairs and maintenance, where they are revenue rather than capital

• Service charges and ground rent paid by the landlord

• Accountancy fees for rental accounts and tax work

• Utility bills and council tax paid by the landlord

• Replacement of domestic items relief where applicable

This makes record keeping especially important.

If a landlord lumps all finance costs and operating expenses together, they can distort the return and lose relief they are still entitled to claim in the normal way.

Checklist: practical Section 24 review for UK landlords

If you own residential lets personally, review the following points each tax year:

• Confirm total rental income received in the tax year

• Separate finance costs from other allowable expenses

• Check whether any finance costs were carried forward from earlier years

• Calculate taxable rental profit before the 20% reducer

• Review whether the higher taxable profit pushes you into a higher tax band

• Check effects on Child Benefit, personal allowance taper or student loan repayments

• Stress-test cash flow using current mortgage rates, not historic ones

• Review whether ownership structure still makes sense

• Consider whether overpaying debt gives a better return than chasing rent increases alone

• Keep records that clearly distinguish interest, fees, repairs and capital expenditure

A sensible planning framework for landlords affected by Section 24

Landlords often look for a single "fix", but there usually is not one.

A better approach is to assess the problem from four angles.

1.

Profitability

Is the property still genuinely profitable after interest, tax and realistic future repairs?

If margins are very thin, the issue may be the investment itself rather than the tax treatment alone.

2.

Borrowing

What is the loan-to-value, rate type and refinance timetable?

A property that worked at 2% interest can become awkward at 6%.

Reducing debt may sometimes produce a cleaner outcome than complex restructuring.

3.

Ownership

Would a joint ownership change, trust planning, or long-term company strategy help?

Only consider this after checking legal and transfer taxes.

4.

Exit strategy

If the property no longer suits your tax profile, would a disposal, phased sell-down, or reallocation of capital produce a better after-tax result?

Sometimes the least glamorous answer is the most financially sound.

Common misunderstandings about Section 24

"I am taxed on turnover."

Not exactly.

You are taxed on rental profit after non-finance expenses, but before deducting restricted finance costs.

It can feel like turnover taxation where interest is high, but that is not technically what is happening.

"Section 24 only matters if I am already a higher-rate taxpayer."

Not necessarily.

Some landlords are pushed into higher-rate tax because the taxable rental profit is artificially inflated by the restriction.

"If I remortgage, the extra borrowing is always fine for tax."

Only where the borrowing is linked properly to the property business and within the relevant value and business purpose limits.

Borrowing used for private spending can create complications.

"A company automatically solves everything."

A company avoids the Section 24 restriction in the same form, but not without trade-offs.

Transfer taxes and extraction taxes matter.

"I can ignore Section 24 because my accountant will sort it."

Your adviser can calculate the return, but you still need to understand the cash flow effect.

Tax surprises usually arise not from the return being filed incorrectly, but from the landlord not anticipating the bill.

How to estimate your position quickly

If you want a rough first-pass estimate of whether Section 24 is hurting you significantly, use this simple approach:

• Work out rental income for the year

• Deduct all allowable non-finance expenses

• That gives your taxable rental profit before the tax reducer

• Estimate tax on that figure at your marginal rate

• Then deduct 20% of qualifying finance costs

• Compare the result with your real cash profit after all costs including interest

If the gap is wide, you have identified a Section 24 pressure point.

At that stage, a fuller review is worth doing.

Final thoughts for UK landlords

Section 24 changed the economics of leveraged residential property ownership for individuals.

For basic-rate taxpayers with modest borrowing, the effect may be manageable.

For higher-rate taxpayers, or landlords with large mortgages and rising interest costs, the impact can be severe.

The main lesson is to separate taxable profit from cash profit.

They are no longer close equivalents where finance costs are significant.

Once you understand that, the rest of the planning becomes clearer.

Landlords who cope best with Section 24 tend to do three things well: they keep precise records, they model cash flow before refinancing or buying, and they review ownership and debt levels with a clear eye rather than assuming property will always absorb tax changes.

There is no universal answer.

Some landlords will retain property personally because the numbers still work.

Some will reduce borrowing.

Some will change ownership structures.

Some will sell.

The right decision depends on tax band, debt level, future plans and the wider household position.

What Section 24 has done, perhaps more than anything else, is force landlords to look beyond headline rent and ask a harder question: after interest, tax and risk, what am I actually keeping?