Understanding Section 24: The Mortgage Interest Relief Restriction for UK Landlords

Since its introduction following the 2015 Summer Budget, Section 24 of the Finance (No. 2) Act 2015 has fundamentally changed how UK landlords claim tax relief on buy-to-let mortgage interest and other finance costs. What was once a straightforward deduction is now a more complex calculation that can directly affect your tax position — especially if you’re a higher-rate taxpayer.

📉 What Has Changed Under Section 24?

Previously, landlords could deduct 100% of mortgage interest from rental income when calculating taxable profit. Section 24 removed that full deduction for individual landlords:

• Mortgage interest and other finance costs (like arrangement fees and certain loan interest used for renovations) can no longer be deducted in full against rental income.
• Instead, relief is replaced with a basic-rate tax credit of 20% on the amount of qualifying interest. UK Landlord Tax
  

This change was phased in between April 2017 and April 2020, and since then all individual residential landlords have been fully subject to the restriction.

📊 How It Works — A Practical Example

Imagine this scenario:

• Rental income: £15,000
  
• Mortgage interest: £5,000
  
• Other allowable costs: £2,000
  

Before Section 24, you might have deducted all finance costs when calculating profit.

Now:

1. Taxable profit is based on rental income less other costs — so here £15,000 – £2,000 = £13,000.
   
2. You pay tax on £13,000 at your marginal rate.
   
3. Relief on the £5,000 of interest is given as a 20% tax credit — i.e., £1,000. UK Landlord Tax

Impact varies by tax band:

• Basic-rate taxpayer: tax liability stays broadly consistent because the 20% credit matches the basic rate.
  
• Higher-rate or additional-rate taxpayers: you’ll pay more tax overall, because interest no longer reduces profit before tax.

This can result in situations where you pay tax on rental income you haven’t actually received — sometimes described as “phantom profits” — because the full cost of servicing debt isn’t recognised for tax purposes.

📈 Who Is Most Impacted?

The tax credit applies equally across tax bands, but its value relative to your tax rate differs:

• Basic-rate taxpayers: see less dramatic impact if rental income stays within the basic band.
  
• Higher/additional-rate taxpayers: can see significant increases in tax liability because you can't offset interest at 40% or 45% anymore.

Even landlords whose overall income sits just below the higher-rate threshold may be pushed into a higher tax band because gross rental profits (before interest) are higher under these rules.

💡 Practical Strategies and Considerations

While Section 24 is now part of the landscape, there are sensible planning options that many investors consider:

1. Review Your Ownership Structure
Incorporating your properties into a special purpose limited company can remain very tax-efficient. Companies can usually continue to deduct mortgage interest as a business expense before calculating profits, which can materially reduce tax bills compared with holding personally.

2. Ownership Transfers
If your spouse or partner pays tax at a lower rate, realigning beneficial ownership can help — but must be approached carefully with professional advice and recognition of SDLT and CGT impacts.

3. Maximise Other Allowable Expenses
Maintenance, repairs, insurance, letting agents’ fees and other costs that remain fully deductible can help manage taxable profits.

4. Portfolio Planning
As interest rate environments and rental markets evolve, model gross versus net rental income to understand where Section 24 creates tax drag — and adjust purchase pricing, borrowing levels, or asset mix accordingly.

🔎 Final Thoughts for Mortgage321 Clients

Section 24 has reshaped the taxation of buy-to-let investing — but with clarity and proactive structuring, landlords can still build resilient portfolios. Understanding your tax position empowers better financing decisions, whether you’re purchasing new properties, remortgaging existing ones, or reviewing your current tax structure.

From individual landlords to complex portfolio investors, proactive planning — and the right professional advice — can make the difference between a tax burden that erodes returns and a structure that supports long-term growth.

If you’d like help modelling Section 24 impacts based on your income, planning an incorporation strategy, or analysing how different ownership structures could optimise tax outcomes for your portfolio, get in touch with Mortgage321 — we specialise in tailored solutions for property investors navigating complex mortgage and tax environments.