Section 24 explained — the UK landlord mortgage interest guide
Section 24 of the Finance (No. 2) Act 2015 changed the way landlords are taxed on mortgage interest. Phased in between 2017 and 2020, it removed the ability for individual (not company) landlords to deduct finance costs from rental income, replacing it with a 20% basic-rate tax credit. Nearly a decade on, it's still the single biggest tax issue facing UK landlords. This guide explains exactly how it works, who loses out the most, and the realistic options to mitigate it.
The headline change in one paragraph
Before Section 24, an individual landlord deducted mortgage interest from rental income as a business expense, paid tax on the profit, and was done. After Section 24 (fully in force from April 2020), the landlord pays tax on the gross rent, then receives a flat 20% basic-rate tax credit on the mortgage interest. For basic-rate taxpayers the position is largely unchanged. For higher-rate (40%) and additional-rate (45%) taxpayers, it's a substantial tax increase.
Worked example
A landlord owns one rental personally. £18,000 annual rent. £10,000 of allowable expenses (£8,000 mortgage interest, £2,000 other costs). The landlord earns £50,000 in employment alongside.
| Calculation step | Pre-Section 24 (2016) | Post-Section 24 (2026) |
|---|---|---|
| Rent received | £18,000 | £18,000 |
| Less: mortgage interest | (£8,000) | — |
| Less: other expenses | (£2,000) | (£2,000) |
| Taxable rental profit | £8,000 | £16,000 |
| Tax at marginal 40% | £3,200 | £6,400 |
| Less: 20% credit on mortgage interest | — | (£1,600) |
| Net tax payable | £3,200 | £4,800 |
Same landlord, same rent, same costs. The Section 24 regime costs them £1,600 more in tax— a 50% increase in the tax bill on unchanged economics. Higher-yield, lower-leverage landlords are barely affected; highly-leveraged landlords in the higher band are hammered.
Who is hit hardest
- Higher-rate taxpayers with significant mortgage interest. The bigger the loan, the bigger the gap between the old 40% relief and the new 20% credit.
- Landlords pushed into the higher band by the rule itself. Because the gross rent is added to income for band purposes, some landlords who were basic-rate before Section 24 are now higher-rate purely because of the change.
- Landlords near the £100,000 income threshold.The personal allowance tapers above this, so adding gross rent rather than profit can cost the full marginal rate plus the lost allowance — an effective rate over 60% on the affected slice.
- Landlords near the £50,000 child-benefit threshold. The High Income Child Benefit Charge taper is now triggered by total income; adding gross rent can wipe out the benefit unexpectedly.
Who is NOT affected
- Basic-rate taxpayers— the 20% credit matches the rate they would have paid on the deducted interest. Net position roughly neutral. (But beware the gross-rent-pushes-you-up trap.)
- Limited-company landlords— companies are out of scope. They continue to deduct interest from rental profit in full, pay corporation tax on profit (currently 19-25%), and reinvest or distribute as dividends.
- Furnished holiday lets (FHLs) — this exemption ended on 6 April 2025. FHLs are now taxed like normal long-term rentals and ARE subject to Section 24. A major change that many landlords have missed.
- Commercial property landlords— out of scope. Office, retail, industrial and other commercial rentals still get full mortgage interest deductibility.
Mitigation options — what actually works
1. Move properties into a limited company
The most-discussed option. Companies aren't hit by Section 24, so highly-leveraged higher-rate landlords often save significant tax. But the move triggers SDLT (the 5% additional dwelling surcharge applies to company purchases too), CGT on the personal disposal, legal costs, and significantly higher mortgage rates / arrangement fees on ltd-company products. Net benefit depends on portfolio scale, leverage and long-term plans. Best for landlords with 3+ properties planning to hold for 10+ years.
2. Pay down debt
Less interest = less Section 24 problem. If you have spare capital, redirecting it from low-yielding deposits to BTL principal repayment can be tax-efficient. Capital repayments don't reduce yield (capital still owned), they just shift the mortgage balance — making future remortgages cheaper as LTV falls and ICR improves.
3. Transfer to a lower-earning spouse
For married couples or civil partners, rental income can be split via a Declaration of Trust + Form 17. Putting more of the income in the hands of the lower-earning spouse can keep the household below higher-rate thresholds. SDLT and CGT considerations apply on the equity transfer.
4. Sell highly-leveraged underperformers
Sometimes the answer is portfolio pruning. Properties that are barely profitable pre-tax become loss-making post-tax for higher-rate landlords. Selling and redeploying the equity into lower-leverage holdings can improve net cashflow.
5. Pension contributions to drop a tax band
Pension contributions reduce taxable income for band-threshold purposes. A landlord on the higher-rate cusp can sometimes use pension contributions to keep total income under the threshold and largely neutralise Section 24 for the year.
Things that don't work
- “Loan to your own company” schemes— HMRC has substantial anti-avoidance machinery. Most schemes marketed in the early Section 24 years have been struck down or now carry punitive risk. Speak to a chartered accountant — not a YouTube guru.
- Re-classifying a normal let as a business or trade— rental income is investment income unless the activity meets the badges of trade (substantial services, hotel-like turnover etc). Very few residential landlords qualify.
Interaction with MTD ITSA
Section 24 doesn't change the qualifying-income test for MTD ITSA — you're measured against gross rent for both thresholds. So a higher-rate landlord on £55,000 gross rent is simultaneously hit by Section 24 (paying tax on the gross rent, not profit) and in scope of MTD ITSA from April 2026 (quarterly reporting on the gross rent). Both rules push in the same direction: the data discipline needed for MTD is the same discipline that helps you model the Section 24 impact each year.
FAQ
Can I still deduct other mortgage costs?
No — Section 24 covers all “finance costs”, which includes mortgage interest, mortgage arrangement fees, and interest on loans used to buy/improve the property (including loans from a director to a company in some cases). All get the 20% credit treatment, not full deduction.
What about furnished holiday lets after April 2025?
FHLs lost their preferential tax regime on 6 April 2025. They're now taxed like regular residential lets — meaning Section 24 applies, capital allowances on furniture stop (replacement-of-domestic-items relief instead), and the property no longer counts as a business asset for IHT or CGT purposes.
Does the 20% credit apply to all my interest, or just up to my profit?
It's tapered. The credit can't reduce your tax bill below zero, and unrelieved interest can be carried forward to future tax years. So a landlord with very low rental profit may not get the full 20% relief in the year — though the unused portion isn't lost.
Should I incorporate just to escape Section 24?
Sometimes yes, often no. Run the numbers including SDLT on the transfer (5% additional dwelling), CGT on the personal disposal, legal/professional fees, and the ongoing higher mortgage costs in a company. A chartered accountant with property specialism can model this in an afternoon for your portfolio.
Disclaimer:This guide is general information, not tax advice. Tax interactions are individual and Section 24 calculations sit inside the wider Self Assessment computation — one figure can ripple through your personal allowance, child benefit, pension annual allowance and CGT positions. Always consult a chartered tax adviser or accountant before making structural decisions about your portfolio.