Section 24: Mortgage Interest Restriction

1. What Section 24 changes

Before April 2017, landlords could deduct mortgage interest (and other finance costs) as an expense against rental income, reducing taxable profit pound-for-pound. If you earned £30,000 of rent and paid £12,000 of mortgage interest, your taxable rental profit was £18,000, taxed at your marginal rate.

Section 24 phased out that deduction between 2017 and 2020 and replaced it with a basic-rate (20%) tax credit applied after the tax calculation. The deduction went from 100% allowable to nil. The practical effect: mortgage interest is now effectively a non-deductible expense for higher- and additional-rate landlords, who used to get 40% or 45% relief and now get 20%.

2. Who It Applies To

• Individual landlords with residential buy-to-let property: the main target of the rule.
• Partnerships holding residential property, treated in the same way.
• Trusts and estates receiving residential rental income.
• Not limited companies. Corporate landlords deduct finance costs in full against corporation tax profits, which is the central driver of the move into property-holding companies (often called Special Purpose Vehicles, or SPVs) since 2017.
• Not Furnished Holiday Lets historically, though the FHL regime was abolished from April 2025, bringing former FHLs into the Section 24 regime.
• Not commercial property. Interest on commercial-let mortgages is still fully deductible.

3. The Mechanics

The calculation now runs in three stages:

1. Work out rental profit ignoring mortgage interest entirely. Rent minus non-finance allowable expenses (repairs, letting fees, insurance, accountant's fees, wear and tear on furnishings where applicable).
2. Add the rental profit to your other taxable income and calculate tax at your marginal rates through the normal income tax bands.
3. Reduce the tax bill by 20% of the finance costs: the basic-rate credit. The credit cannot exceed the tax due on the property income, so it cannot create a repayment on its own.

4. The Tax-Band Drag Effect

Because the interest is no longer deducted from rental income, gross rent is added to your other earnings when calculating which tax band applies. A basic-rate taxpayer can be dragged into the higher-rate band, triggering not just a 40% marginal rate on the top slice of income, but also:

• Loss of personal allowance at £100,000 (tapered to nil at £125,140).
• Loss of the £500 personal savings allowance for higher-rate taxpayers (dropping from £1,000 at basic rate).
• Loss of eligibility for marriage allowance transfer.
• High Income Child Benefit Charge kicking in from £60,000.
• Loss of the tax-free childcare scheme where it exists.

This "band-drag" effect is often bigger than the direct extra tax from the mortgage interest itself. Landlords who were comfortably basic-rate before 2017 now routinely report effective tax rates above 60% on the marginal slice of rental profit.

5. Worked Example

A landlord earns £50,000 salary. Buy-to-let portfolio generates £30,000 gross rent, with £12,000 of mortgage interest and £4,000 of other allowable costs.

Run the numbers on your own portfolio with our Section 24 Tax Impact Calculator. It models the extra tax, the effective marginal rate on the geared slice, and the break-even point for incorporation.

6. The Workarounds

• Incorporation (SPV structure). Moving a portfolio into a limited company restores full interest deduction at corporation tax rates (19-25%). The downside is SDLT on the transfer, potentially CGT, and the need to refinance mortgages onto buy-to-let company rates. Incorporation relief under s162 TCGA can eliminate the CGT in genuine-partnership cases, but SDLT usually still bites unless a specific relief applies. See our SPV incorporation article.
• Transferring to a lower-earning spouse. A Form 17 declaration (with ownership restructuring) can shift rental income to the spouse paying tax at a lower marginal rate. Works best where one partner has little or no other income.
• Gearing down the portfolio. Using savings to pay down mortgage balances reduces the problem at source. The decision trades tax saving against the opportunity cost of the cash.
• Focusing on unencumbered or lightly-geared properties. Section 24 has no bite where there is no mortgage interest to restrict.
• Switching into commercial property or HMOs. Commercial property is outside Section 24 entirely. HMOs are covered but can support higher yields that cushion the impact.
• Pension contributions to reduce threshold income. Pension relief extends the basic-rate band, softening the band-drag effect for borderline higher-rate landlords.

7. Planning for 2026 and Beyond

Section 24 is now baked into the system. There is no political appetite to reverse it, and with MTD for Income Tax Self Assessment arriving for landlords in April 2026 (initial threshold £50,000 gross rental plus other self-employed income), the compliance burden on non-incorporated landlords is still increasing.

The highest-yield 2026 move for most geared landlords is still to model incorporation carefully, not to assume it always wins, but to get a clean pound-value comparison of the lifetime tax, SDLT, mortgage, and refinance costs. Landlords with a single property, low gearing, or approaching a sale are usually better served by the smaller workarounds. Landlords with growing portfolios and long horizons typically find that the recurring Section 24 drag eventually outweighs the one-off transfer costs.

Our property tax accountants service runs a full Section 24 impact model on every new landlord engagement: incorporation vs status-quo, including the SDLT, CGT and refinance cost comparison.