A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
Section 24 of the Finance (No. 2) Act 2015, usually shortened to just "section 24" or "the mortgage interest relief restriction", has reshaped buy-to-let economics for higher-rate landlords. If you own residential property in your own name and have a mortgage on it, section 24 affects you. Let me walk you through how it works in practice.
The old rules (pre-2017)
Before section 24, landlords simply deducted mortgage interest as a normal rental expense. Higher-rate taxpayers effectively got 40% relief on every pound of interest they paid.
The new rules (fully in force from 2020/21)
You can no longer deduct mortgage interest from rental income. Instead, you get a basic-rate tax credit of 20% on your finance costs. For basic-rate taxpayers, that's broadly neutral. For higher- and additional-rate taxpayers, it's a real-terms tax rise.
Worked example: higher-rate landlord
Say a landlord owns two rental properties in their own name:
- Gross rents: £24,000
- Allowable expenses (repairs, agents, insurance, etc.): £4,000
- Mortgage interest: £12,000
- The landlord is otherwise a higher-rate taxpayer.
Old rules: Profit = £24,000 − £4,000 − £12,000 = £8,000. Tax at 40% = £3,200.
Section 24: Profit (ignoring interest) = £20,000. Tax at 40% = £8,000. Less basic-rate credit on £12,000 of interest = £2,400. Tax payable = £5,600.
That's £2,400 more tax on exactly the same economic profit. And because rental profit (now £20,000 rather than £8,000) sits inside the income-tax calculation, more landlords get pushed into the higher- or additional-rate band, caught by the £100k personal allowance taper, or stripped of child benefit.
Who is unaffected?
- Landlords who own property through a limited company. Section 24 doesn't apply to companies, which deduct interest normally.
- Furnished Holiday Lettings (for now, though FHL tax treatment is itself being reformed).
- Commercial property landlords.
- Basic-rate landlords whose total income, even after the gross-up, still keeps them basic-rate.
What can you do about it?
There's no silver bullet, but there are levers worth pulling:
- Reduce gearing. Pay down the mortgage where you can; less interest means a smaller section 24 hit.
- Spousal transfer. Shift some of the property income to a lower-earning spouse, usually via a Declaration of Trust (Form 17 for jointly owned property).
- Incorporation. Move the portfolio into a limited company. This is rarely a no-brainer, because it can trigger SDLT and CGT, and refinancing on company terms costs more. For higher-rate landlords with substantial portfolios, though, it often pays.
- Pension contributions. Personal pension contributions extend your basic-rate band, which can claw back some of the relief.
When is incorporation worth it?
The honest answer is when the long-term income tax saving outweighs the upfront SDLT and CGT cost, plus the ongoing corporate compliance. For two-property portfolios it rarely stacks up. For ten-property higher-rate portfolios it often does. The only reliable answer comes from a full numerical model built around your specific properties, mortgages and goals.
That's the work we do for landlords every week. If section 24 is squeezing your buy-to-let returns, book a free consultation and we'll run the numbers for your portfolio. See also our property tax specialists in Kent page.