Section 24: Landlord Mortgage Interest Tax Relief

What section 24 changed

Before 2017, a landlord treated mortgage interest like any other cost. Rent came in, interest and expenses came off, and income tax was paid on what was left. Section 24 of the Finance (No. 2) Act 2015 removed that treatment for residential landlords who own property in their own name. Mortgage interest is no longer an allowable expense deducted from rental income.

In its place, landlords receive a basic rate tax credit worth 20% of their finance costs. The credit reduces the final tax bill, but it does not reduce taxable rental income. That distinction is the whole story: taxable rental income is now calculated as if the mortgage barely exists, then a flat 20% credit is applied afterwards.

This change is the single biggest reason landlords ask us about companies. It sits at the centre of the wider limited company property finance decision, alongside transferring buy to let to a limited company.

How the 20% tax credit works

The mechanics run in a fixed order. First, HMRC works out taxable profit by taking rental income and deducting allowable expenses, but not mortgage interest. Second, tax is charged on that profit at the landlord's marginal rate. Third, a tax reducer worth 20% of the mortgage interest is subtracted from the bill.

For a basic rate taxpayer, deducting interest at 20% or getting a 20% credit come to roughly the same thing, so the change is close to neutral. For a higher rate taxpayer who would once have relieved interest at 40%, getting only 20% back is a real and permanent increase in tax on the same rental income.

1. Add up rental income for the year.
2. Deduct allowable expenses such as letting fees, repairs, insurance and ground rent on a leasehold, but not mortgage interest.
3. Calculate income tax on the resulting profit at your marginal rate.
4. Subtract a tax credit equal to 20% of the mortgage interest paid.
5. The figure left is the tax actually due on the rental income.

A worked example: the higher rate squeeze

Numbers make it concrete. Take a landlord with rental income of £20,000 a year, mortgage interest of £10,000 and other allowable expenses of £2,000. Compare the old rules with section 24 for a higher rate taxpayer.

Same rental income, same mortgage, same landlord. The tax bill rises from £3,200 to £5,200, an extra £2,000 a year purely from the change in how mortgage interest relief is given. On a highly geared property the higher taxable rental income can even tip a landlord into the higher rate band they were not in before.

Why a limited company is not caught

Section 24 applies only to individuals. A limited company that owns buy to let property deducts mortgage interest from rental income in full, exactly as it did before, because a company pays corporation tax rather than income tax. Interest is simply a business cost that reduces the company's taxable profit.

In the worked example above, a company would be taxed on £8,000 of profit, not £18,000. At the 19% small profits rate that is £1,520 of corporation tax, against £5,200 for the higher rate individual. That gap is what drives landlords to incorporate, though drawing the profit out as dividends adds a second tax layer, and moving an existing property into a company can trigger capital gains tax and stamp duty on the way in. The tax relief on interest is only one part of the sum.

The catch is getting money out, and the cost of moving property in. Read SPV vs trading company for the structure, see how the borrowing works on the limited company buy to let mortgages page, then model your own position in the limited company vs personal calculator.

Reporting it on your self assessment tax return

The change plays out on your self assessment tax return. Each tax year you report your income from property, deduct your allowable expenses, and arrive at the profit from your property business. Under section 24, mortgage interest is no longer one of those deductions; it is handled separately as the finance costs figure that generates the 20% credit.

So the running order on the return is deliberate. Allowable expenses such as letting agent fees, repairs, insurance and ground rent reduce your taxable rental income. Your finance costs, mainly mortgage interest payments, sit outside that and instead reduce your tax bill by 20% at the end. Getting this split right on the return is what stops you either overpaying or making a claim HMRC will query.

Can I still claim any mortgage interest relief?

Yes, but only as the 20% credit, and only against rental income and finance costs. The credit covers mortgage interest, interest on loans to buy furnishings, and fees such as an arrangement fee or product fee on the buy to let borrowing. What you cannot do is deduct that interest from rental income to shrink the taxable profit in the first place.

There is one quirk worth knowing. The credit is limited to 20% of the lower of your finance costs, your property profits, or your total income above the personal allowance. In a low profit or loss year, part of the credit can be carried forward rather than lost, which softens the blow in a difficult year.

Section 24

The tax rule that removed the deduction of mortgage interest from rental income for individual landlords, replacing it with a 20% basic rate tax credit.

Tax credit (finance cost reducer)

A reduction in a landlord's income tax bill worth 20% of allowable mortgage interest and finance costs.

Mortgage interest relief

The tax benefit landlords receive for interest paid on buy to let borrowing, now given only as a 20% credit for individuals.

Corporation tax

The tax a company pays on its profit, 19% up to £50,000 and up to 25% above, with marginal relief between, charged after full deduction of mortgage interest.