Section 24 Explained: How Mortgage Interest Tax Relief Restriction Affects UK Landlords
Section 24 replaced the old system of deducting mortgage interest from rental income with a basic-rate tax credit - significantly increasing tax bills for higher-rate taxpayer landlords. Here's what you need to know.
What Is Section 24?
Section 24 of the Finance (No. 2) Act 2015, introduced by then-Chancellor George Osborne, fundamentally changed how individual landlords are taxed on rental income in the UK. Before Section 24, landlords could deduct their mortgage interest payments from rental income before calculating tax - just like any other business expense.
Under the new rules, landlords must declare their full rental income (before mortgage interest deductions) as taxable income. They then receive a 20% tax credit based on the lower of: their finance costs, their property profits, or their adjusted total income.
The change was phased in gradually from April 2017 to April 2020 and has been fully in effect since the 2020-21 tax year.
How the Tax Credit System Works
The mechanics of Section 24 are straightforward but the impact can be significant:
- Calculate your total rental income for the year
- Deduct allowable expenses (repairs, insurance, agent fees) but NOT mortgage interest
- Pay income tax on this profit at your marginal rate (20%, 40%, or 45%)
- Receive a tax credit of 20% of your mortgage interest costs
For basic-rate taxpayers, the effect is neutral - you pay 20% tax and receive a 20% credit. But for higher-rate taxpayers paying 40% tax, the 20% credit only covers half the relief they previously received. For additional-rate taxpayers at 45%, the gap is even wider.
Worked Example: Before & After Section 24
Consider a higher-rate taxpayer with rental income of £20,000 and mortgage interest of £10,000 per year:
Before Section 24
- Rental income: £20,000
- Less mortgage interest: -£10,000
- Taxable profit: £10,000
- Tax at 40%: £4,000
After Section 24
- Rental income: £20,000
- Taxable profit (no interest deduction): £20,000
- Tax at 40%: £8,000
- Less 20% tax credit on £10,000: -£2,000
- Tax payable: £6,000
Result: The landlord pays £2,000 more tax per year - a 50% increase - on the same rental income and costs. For landlords with multiple properties and high leverage, the cumulative impact can be substantial.
Who Is Most Affected?
Section 24 disproportionately impacts certain types of landlords:
- Higher-rate and additional-rate taxpayers: The 20-25 percentage point gap between their tax rate and the credit rate creates a significant extra cost.
- Highly leveraged landlords: Those with large mortgages relative to property values face the biggest impact because they have more non-deductible interest.
- Landlords in expensive areas: London and South East landlords with high mortgage costs but moderate yields are particularly squeezed.
- Those pushed into higher tax bands: Some basic-rate taxpayers find that counting gross rental income (without mortgage interest deduction) pushes them into the 40% band.
Limited Company Alternative
Section 24 does not apply to properties held within a limited company. Companies can still deduct mortgage interest as a business expense and pay corporation tax (25% as of April 2023) on the remaining profit.
For new purchases, many higher-rate taxpayer landlords now default to buying through a company. However, transferring existing personally-owned properties into a company triggers both CGT on any gain and fresh SDLT on the market value - costs that often outweigh the long-term tax savings unless the portfolio is large and held for many years.
Professional tax advice is essential before making this decision. The optimal structure depends on your income, portfolio size, borrowing levels, and long-term plans.
Mitigation Strategies
1. Reduce leverage
Pay down mortgages to reduce non-deductible interest. This improves cash flow but ties up capital that could be invested elsewhere.
2. Transfer to a lower-earning spouse
If one partner is a basic-rate taxpayer, transferring property ownership (or a share of it) can reduce the Section 24 impact. A Form 17 declaration and deed of trust may be needed.
3. Buy new properties through a company
While existing properties remain personally owned, future purchases through a limited company avoid Section 24 entirely.
4. Focus on higher-yield properties
Properties with higher yields relative to their mortgage costs are less affected by Section 24. Northern UK cities with strong yields can be more tax-efficient than lower-yield London properties.
Frequently Asked Questions
Section 24 of the Finance (No. 2) Act 2015 changed how landlords can claim tax relief on mortgage interest. Previously, mortgage interest was deducted from rental income before calculating tax. Now, landlords pay tax on their full rental income and receive only a 20% tax credit for mortgage interest costs. This means higher-rate (40%) and additional-rate (45%) taxpayers pay significantly more tax.
PropertyWiki Team
Editorial Team
Published: April 7, 2026
Updated: April 7, 2026
PropertyWiki's editorial team provides data-driven property investment analysis and guides for UK buyers and investors.