What Is Section 24 Tax Relief?

Section 24 represents one of the most significant tax changes affecting UK landlords in recent years. Introduced gradually between 2017 and 2020, this legislation fundamentally altered how landlords can claim tax relief on mortgage interest payments for residential buy-to-let properties.

Before Section 24, landlords could deduct their entire mortgage interest costs from their rental income before calculating their tax liability. This meant mortgage interest was treated as a legitimate business expense, just like repairs, insurance, or letting agent fees.

Section 24 changed this completely. Now, landlords can no longer deduct mortgage interest as an expense. Instead, they receive a basic rate tax credit (currently 20%) on their mortgage interest costs. This seemingly small technical change has had enormous financial implications for many property investors, particularly those paying higher or additional rate tax.

The official name for this legislation is actually the “restriction of finance cost relief,” but it’s commonly known as Section 24 after the section of the Finance (No. 2) Act 2015 that introduced it.

How Section 24 Works in Practice

Understanding the mechanics of Section 24 is crucial for calculating your actual tax liability.

Under the old system, if you earned £20,000 in rental income and paid £10,000 in mortgage interest, you’d only pay tax on £10,000 of profit (after deducting other allowable expenses). As a higher-rate taxpayer, you’d pay 40% on that £10,000, resulting in a £4,000 tax bill.

Under Section 24, you cannot deduct the £10,000 mortgage interest from your rental income. Instead, you pay tax on the full £20,000 of rental income. For a higher-rate taxpayer, that’s £8,000 in tax. You then receive a 20% tax credit on your £10,000 mortgage interest, which equals £2,000. Your final tax bill becomes £6,000 (£8,000 minus £2,000).

The difference? You’re now paying £2,000 more in tax on exactly the same rental income and mortgage costs.

This simplified example doesn’t include other allowable expenses like repairs, insurance, or letting fees, which you can still deduct fully. However, it demonstrates why Section 24 has been so controversial among landlord organisations.

Who Is Affected by Section 24?

Section 24 applies specifically to individual landlords who own residential buy-to-let properties in their personal names. This is a crucial distinction.

You ARE affected if you:

  • Own residential rental properties as an individual
  • Have a mortgage or loan secured against those properties
  • Pay income tax at the higher rate (40%) or additional rate (45%)

You are NOT affected if you:

  • Own properties through a limited company (companies still deduct interest as a business expense)
  • Own only commercial properties
  • Have no mortgage on your rental properties
  • Are a basic rate taxpayer with relatively low rental income

That last point deserves emphasis. Basic rate taxpayers may see little or no impact from Section 24, since they’re receiving a 20% tax credit on mortgage interest and would have paid 20% tax on that income anyway. The real impact falls on higher and additional rate taxpayers.

The Tax Band Trap

One of Section 24’s most insidious effects is what’s known as the “tax band trap.” Because you can no longer deduct mortgage interest from rental income, your taxable income appears higher on paper. This can push landlords from the basic rate tax band into the higher rate band, or from higher rate into additional rate.

Consider a landlord with a £45,000 salary and £15,000 in rental income after all expenses except mortgage interest. They pay £12,000 in mortgage interest annually. Before Section 24, their total taxable income was £48,000 (£45,000 + £15,000 - £12,000), keeping them mostly in the basic rate band.

After Section 24, their taxable income is £60,000 (£45,000 + £15,000), pushing them well into the higher rate band. They lose their personal allowance taper if their income exceeds £100,000, and they may lose entitlement to child benefit, tax-free childcare, and other means-tested benefits.

This “phantom income” problem means landlords can face tax bills on money they never actually received, since much of their rental income goes straight to the mortgage lender.

Strategies to Minimise Section 24 Impact

Landlords have several options to reduce the impact of Section 24, though each comes with its own considerations and costs.

Transferring Properties to a Limited Company

Many landlords have incorporated their property businesses, transferring properties into limited company ownership. Companies can still deduct mortgage interest as a business expense and pay corporation tax (currently 25% for profits over £250,000, or 19% for smaller profits).

However, transferring properties triggers capital gains tax and stamp duty land tax costs. You’ll also face ongoing accountancy fees and corporation tax compliance requirements. This strategy typically works best for landlords with substantial portfolios or those planning long-term expansion.

Spousal Transfers

If you’re married or in a civil partnership and one partner pays less tax than the other, transferring property ownership to the lower-earning spouse can reduce your overall tax bill. Property transfers between spouses are generally tax-free, making this a relatively straightforward strategy.

The lower-earning spouse then declares the rental income on their tax return, potentially keeping more income in the basic rate band.

Paying Down Mortgages

Reducing your mortgage balance reduces the interest you pay, which reduces the Section 24 impact. If you have surplus cash, overpaying your mortgage can make financial sense, though you should compare the tax savings against alternative investment returns.

Reviewing Your Portfolio Strategy

Some landlords have decided that buy-to-let no longer makes financial sense given Section 24 and other regulatory changes. They’ve sold properties and redirected capital into other investments, such as commercial property, which isn’t subject to Section 24, or into their pension funds.

Section 24 and Limited Companies

The exemption for limited companies has driven a significant shift in how landlords structure their property businesses. Limited companies can still deduct mortgage interest in full when calculating their taxable profits.

However, running a property business through a limited company isn’t automatically better. You’ll pay corporation tax on profits, then potentially income tax and dividend tax when extracting money from the company. You’ll also face higher mortgage rates, as buy-to-let mortgages for limited companies typically carry interest rate premiums of 0.5% to 1% above personal mortgages.

For landlords with large portfolios or high tax rates, the mathematics often favours limited company ownership. For smaller landlords or those planning to sell properties in the near future, personal ownership may still make more sense. This is precisely the type of decision where professional accountancy advice proves invaluable, as the optimal structure depends on your individual circumstances, plans, and tax position.

Claiming Your Section 24 Tax Credit

When completing your Self Assessment tax return, you’ll report your rental income on the property pages as usual. You’ll deduct allowable expenses (everything except mortgage interest and other finance costs), which gives you your taxable property income.

Your mortgage interest gets reported separately in the “residential finance costs” section. HMRC’s system calculates the 20% tax credit automatically and applies it to reduce your overall tax bill.

Keep meticulous records of your mortgage interest payments. Your lender should provide an annual statement showing interest paid. If you have interest-only mortgages, this is straightforward. With repayment mortgages, only the interest portion qualifies for the tax credit, not the capital repayment element. Landlord management software such as Landlord Vision can help you log finance costs and track your portfolio finances year-round, making the Self Assessment process considerably less painful.

Other Finance Costs Affected

Section 24 doesn’t only affect mortgage interest. It also restricts tax relief on other finance costs related to residential property, including:

  • Loans to buy furnishings for rental properties
  • Remortgage fees and arrangement fees
  • Interest on loans for property repairs or improvements
  • Interest on loans to cover inheritance tax on inherited rental properties

All these finance costs now receive only the 20% tax credit rather than full deduction as expenses.

Key Takeaways

Section 24 has fundamentally changed the economics of buy-to-let property investment in the UK. Understanding its impact is essential for any landlord with mortgaged properties.

The key points to remember:

  • Mortgage interest is no longer a deductible expense for individual landlords
  • You receive a 20% tax credit on mortgage interest instead
  • Higher and additional rate taxpayers face the biggest impact
  • Section 24 can push you into higher tax bands, affecting other benefits and allowances
  • Limited companies remain exempt from Section 24
  • Various strategies can mitigate the impact, but each has costs and complications

Given the complexity of Section 24 and its interaction with your wider tax position, consulting a qualified accountant who specialises in property taxation is strongly recommended. They can model different scenarios, calculate your actual tax liability, and advise on the most tax-efficient structure for your property business.

Section 24 has certainly made buy-to-let more challenging, but with proper planning and professional advice, many landlords continue to build successful property portfolios despite the changed tax landscape.