Section 24 Mortgage Interest Relief: What Landlords Need to Know

Section 24 of the Finance (No. 2) Act 2015 fundamentally changed the way mortgage interest is treated for individual landlords in the UK. Before this legislation, landlords could deduct the full cost of their mortgage interest from their rental income before calculating tax. Now, that deduction has been entirely replaced by a basic-rate tax credit of 20%.

For basic-rate taxpayers, the net effect is broadly neutral. But for higher-rate and additional-rate taxpayers, Section 24 has significantly increased the amount of tax paid on rental income. Understanding exactly how this works is critical for any landlord with a mortgage on their rental property.

How Section 24 Changed the Rules

Before Section 24, a landlord receiving £12,000 per year in rent with £6,000 in mortgage interest would only be taxed on £6,000 of profit. If they were a higher-rate taxpayer paying 40%, the tax on rental income would be £2,400.

Under Section 24, the full £12,000 of rental income is now treated as taxable income. The landlord then receives a 20% tax credit on the £6,000 of mortgage interest, which is £1,200. So the tax calculation becomes: £12,000 taxed at 40% = £4,800, minus the £1,200 tax credit, giving a final tax bill of £3,600.

That is £1,200 more per year in tax compared to the old system. For landlords with large mortgages across multiple properties, the additional tax can run into thousands of pounds annually.

Who Is Affected?

Section 24 applies to individual landlords who own rental properties in their personal name. It does not apply to properties held within a limited company, as companies pay corporation tax and can still deduct mortgage interest as a business expense.

The impact is most significant for:

• Higher-rate taxpayers (40%): Lose 20% of their mortgage interest as a tax deduction
• Additional-rate taxpayers (45%): Lose 25% of their mortgage interest deduction
• Landlords pushed into a higher tax band: Because rental income is no longer reduced by mortgage interest before calculating total taxable income, some basic-rate taxpayers find that their rental income pushes them into the higher-rate band
• Landlords claiming means-tested benefits or child benefit: The higher reported income can affect eligibility for tax credits, child benefit, and other income-related entitlements

The Tax Credit Calculation Step by Step

Here is how to calculate your tax position under Section 24:

1. Calculate your total rental income across all properties
2. Deduct all allowable expenses except finance costs (repairs, insurance, agent fees, etc.)
3. The result is your property income for tax purposes. Add this to your other income (employment, self-employment, etc.) to determine your total taxable income and tax band
4. Calculate tax on your total taxable income at the relevant rates
5. Deduct the 20% tax credit on your finance costs. The credit is 20% of the lower of: your total finance costs, your property profits, or your adjusted total income

The restriction on the tax credit (step 5) is important. If your property makes a loss after deducting non-finance expenses, the tax credit may be limited. Similarly, if your total income is low, the credit cannot exceed 20% of that income.

Strategies for Managing the Section 24 Impact

While you cannot avoid Section 24 if you own property personally, there are legitimate strategies to manage its impact:

Transferring Properties to a Limited Company

Companies can still deduct mortgage interest in full. However, transferring existing properties into a company triggers Capital Gains Tax and Stamp Duty Land Tax, so the upfront costs can be substantial. This strategy tends to work best for landlords buying new properties rather than transferring existing ones. Always take professional tax advice before restructuring.

Paying Down Mortgages

Reducing your mortgage balances directly reduces the finance costs affected by Section 24. If you have savings earning modest interest, using them to pay down a buy-to-let mortgage can be more tax-efficient than keeping the cash in a savings account.

Using Your Personal Allowance

If your spouse or partner has unused personal allowance or is a basic-rate taxpayer, transferring a share of property ownership to them can reduce the overall Section 24 impact on your household. Again, this requires careful planning and professional advice.

Accurate Expense Tracking

Maximising your allowable non-finance expenses directly reduces your taxable property income. Many landlords miss legitimate expenses because they do not keep thorough records. Using digital expense tracking ensures you claim every deduction you are entitled to.

How LandlordGuru Helps with Section 24

LandlordGuru includes a dedicated Section 24 Analysis report that calculates the exact impact of the finance cost restriction on your tax position. You can see at a glance how much additional tax Section 24 is costing you, compare the old versus new tax treatment, and model different scenarios such as paying down mortgages or restructuring ownership.

When you submit your quarterly MTD returns through LandlordGuru, the finance cost restriction is handled automatically. Your mortgage interest is reported correctly and the 20% tax credit is calculated for you, ensuring your submissions to HMRC are accurate.

Looking Ahead

There has been no indication from the government that Section 24 will be reversed. If anything, the trend is toward greater scrutiny of landlord taxation. Understanding how Section 24 affects your specific situation is essential for long-term financial planning.

If you have not yet modelled the impact of Section 24 on your portfolio, now is the time. Knowing your true after-tax returns helps you make informed decisions about whether to hold, sell, or restructure your property investments. Tools like LandlordGuru's Section 24 report make this analysis straightforward.