Section 24 of the Finance (No.2) Act 2015 restricts mortgage interest tax relief for residential landlords. Instead of deducting mortgage interest from rental income before calculating tax, landlords now receive a 20% tax credit on interest payments. This change significantly increases tax bills for higher rate and additional rate taxpayers.
This guide explains how Section 24 works, who it affects, and strategies to reduce its impact.
What is Section 24?
Section 24 changed how mortgage interest is treated for individual landlords:
| Before Section 24 | After Section 24 (Now) | |-------------------|------------------------| | Deduct mortgage interest from rental income | Cannot deduct mortgage interest | | Pay tax on reduced profit | Pay tax on full rental income | | Relief at your marginal rate (20/40/45%) | Receive 20% tax credit on interest |
Key point: You still get tax relief on mortgage interest, but it's now capped at the basic rate (20%), regardless of your marginal tax rate.
How the Tax Credit Works
- Calculate rental profit without deducting mortgage interest
- Pay Income Tax on this full amount at your marginal rate
- Receive a 20% tax credit on your mortgage interest payments
- Tax credit reduces your final tax bill
The credit equals 20% of the lower of:
- Finance costs (mortgage interest)
- Property profits (before finance costs)
- Adjusted total income (if lower)
Section 24 Impact: Worked Examples
Example 1: Basic Rate Taxpayer
Sarah: £15,000 rental income, £6,000 mortgage interest, other income keeps her in basic rate band
| Calculation | Amount | |-------------|--------| | Rental income | £15,000 | | Allowable expenses (not interest) | £3,000 | | Taxable property income | £12,000 | | Tax at 20% | £2,400 | | Mortgage interest | £6,000 | | Tax credit (20% × £6,000) | −£1,200 | | Final tax | £1,200 |
Effective rate: £1,200 ÷ £12,000 = 10%
For basic rate taxpayers, Section 24 has minimal impact—the 20% credit matches what deduction relief would have given.
Example 2: Higher Rate Taxpayer
James: £30,000 rental income, £15,000 mortgage interest, 40% taxpayer
Before Section 24 (old rules): | Calculation | Amount | |-------------|--------| | Rental income | £30,000 | | Mortgage interest deduction | −£15,000 | | Other expenses | −£5,000 | | Taxable profit | £10,000 | | Tax at 40% | £4,000 |
After Section 24 (current rules): | Calculation | Amount | |-------------|--------| | Rental income | £30,000 | | Other expenses | −£5,000 | | Taxable property income | £25,000 | | Tax at 40% | £10,000 | | Tax credit (20% × £15,000) | −£3,000 | | Final tax | £7,000 |
Section 24 cost: £7,000 − £4,000 = £3,000 extra tax per year
Example 3: Pushed into Higher Rate
Emma: £35,000 salary, £20,000 rental income, £12,000 mortgage interest
Without Section 24 effect:
- Salary: £35,000
- Rental profit (old calculation): £20,000 − £12,000 = £8,000
- Total income: £43,000
- Tax rate: Basic rate (under £50,270)
With Section 24:
- Salary: £35,000
- Rental profit (new calculation): £20,000 (no interest deduction)
- Total income: £55,000
- Tax rate: £4,730 at higher rate (40%)
Section 24 can push landlords into higher tax bands, increasing tax on their employment income too.
Who Does Section 24 Affect?
Affected by Section 24
- Individual landlords (personal ownership)
- Residential rental properties
- UK and overseas landlords with UK property
- Landlords who are joint owners as individuals
NOT Affected by Section 24
| Entity/Property Type | Section 24 Applies? | |---------------------|---------------------| | Limited companies | No—can fully deduct interest | | Furnished Holiday Lets | No (until April 2025, then rules change) | | Commercial property | No—different rules apply | | Property held in pension (SIPP/SSAS) | No |
How to Calculate Your Section 24 Impact
Step 1: Calculate Property Income
Add up all rental income received during the tax year.
Step 2: Deduct Allowable Expenses (Except Interest)
Deduct expenses that are still fully allowable:
- Letting agent fees
- Repairs and maintenance
- Insurance
- Ground rent and service charges
- Accountant fees
- Marketing and advertising
- Travel to properties
Step 3: Calculate Tax on Property Profit
Add property profit to your other income. Apply Income Tax rates:
| Band | Rate | |------|------| | Personal Allowance (to £12,570) | 0% | | Basic rate (£12,571 – £50,270) | 20% | | Higher rate (£50,271 – £125,140) | 40% | | Additional rate (over £125,140) | 45% |
Step 4: Calculate Your Tax Credit
Tax credit = 20% × finance costs (mortgage interest)
The credit is limited to the lower of:
- Your finance costs
- Your property profits
- Your remaining Income Tax liability
Step 5: Subtract Credit from Tax Bill
Your final tax = Tax calculated − Tax credit
Strategies to Reduce Section 24 Impact
1. Incorporate (Transfer to Limited Company)
Limited companies can fully deduct mortgage interest, avoiding Section 24 entirely.
Pros:
- No Section 24 restriction
- Corporation Tax (25%) may be lower than personal rates
- Can retain profits in company
- Potential inheritance planning benefits
Cons:
- Stamp Duty Land Tax on transfer (unless using incorporation relief)
- Legal and accounting costs
- Different mortgage products (often higher rates)
- Profits taxed again when extracted (dividends)
- Loss of Personal Allowance on rental income
Best for: Landlords with:
- Multiple properties
- High mortgage interest relative to income
- Higher/additional rate tax status
- Long-term investment horizon
Learn more: Incorporating a Property Portfolio
2. Reduce Mortgage Borrowing
Lower mortgage = lower interest = smaller Section 24 impact.
Consider:
- Overpaying mortgages where possible
- Using savings to reduce loan-to-value
- Remortgaging to lower rates (reducing interest paid)
Trade-off: Less leverage means lower returns in rising markets.
3. Transfer Ownership to Lower-Earning Spouse
If your spouse is a basic rate taxpayer (or below the Personal Allowance), transferring property ownership shifts income to them.
Requirements:
- Must be legally married or in civil partnership
- Transfer must be genuine (actual ownership change)
- HMRC may scrutinise if transfer appears tax-motivated only
For jointly owned property: You can submit a Form 17 to HMRC to split income unequally (matching actual ownership percentages).
4. Increase Rent
Higher rent means the fixed mortgage interest becomes a smaller proportion of income.
Limitations:
- Market conditions limit rent increases
- Higher rent may increase void periods
- May push you further into higher tax bands
5. Convert to Furnished Holiday Let
FHLs have different tax treatment and historically avoided Section 24 restrictions. However, FHL tax advantages are being removed from April 2025.
From April 2025: FHLs will be treated the same as other residential lets for tax purposes, including Section 24.
6. Sell Loss-Making Properties
If Section 24 creates a tax loss position (you're paying tax despite making no economic profit), consider selling.
Caution: Capital Gains Tax applies to property sales. Calculate the full tax position before selling.
Section 24 and Tax Losses
The "Phantom Profit" Problem
Section 24 can create taxable profit even when you're making an economic loss.
Example:
- Rental income: £12,000
- Mortgage interest: £10,000
- Other expenses: £4,000
- Economic profit: −£2,000 (a loss)
- Taxable profit: £12,000 − £4,000 = £8,000
- Tax at 40%: £3,200
- Tax credit (20% × £10,000): −£2,000
- Tax payable: £1,200 (on a £2,000 economic loss)
This "phantom profit" taxation is Section 24's most criticised effect.
Carried Forward Tax Credit
If your tax credit exceeds your tax liability in a year, the unused credit carries forward. However, it can only reduce tax to zero—you cannot receive a refund of unused credit.
Making Tax Digital and Section 24
From April 2026 (income over £50,000) or April 2027 (income over £30,000), landlords must comply with Making Tax Digital.
Section 24 calculations are handled by MTD-compatible software:
- Record mortgage interest payments
- Software calculates the tax credit
- Quarterly submissions show finance costs separately
- Final declaration includes the Section 24 calculation
TaxFolio handles Section 24 calculations automatically as part of MTD compliance.
Frequently Asked Questions
Can I offset Section 24 losses against other income?
No. The tax credit only reduces your tax liability—it cannot create a refund or offset other income.
Does Section 24 apply to interest on loans for deposits?
Yes. Any interest on borrowing used to purchase or improve residential rental property falls under Section 24.
What if I have multiple properties?
Section 24 applies to your total residential property portfolio. All mortgage interest is combined, and the tax credit applies to the total.
Does refinancing affect Section 24?
Refinancing to a lower rate reduces your interest payments, which reduces Section 24's impact. However, you cannot claim interest on borrowing that exceeds the property's original purchase price (anti-avoidance rules).
Is equity release affected?
Interest on equity released from a rental property is only relievable if the funds are used for property business purposes. Personal use of released equity doesn't qualify for the tax credit.
Section 24 Timeline
| Tax Year | Finance Cost Deduction | Tax Credit | |----------|----------------------|------------| | 2016/17 | 100% | 0% | | 2017/18 | 75% | 25% | | 2018/19 | 50% | 50% | | 2019/20 | 25% | 75% | | 2020/21 onwards | 0% | 100% |
Section 24 has been fully implemented since April 2020. There are no further transitional changes planned.
Reporting Section 24 on Self Assessment
On your Self Assessment return (SA105):
- Report rental income and allowable expenses (not including finance costs)
- Enter finance costs in the dedicated box
- HMRC calculates the tax credit automatically
- Credit appears as a reduction in your tax calculation
Most tax software handles this automatically—you simply enter your mortgage interest separately from other expenses.
Track Section 24 with TaxFolio
TaxFolio makes Section 24 calculations simple:
- Separate finance cost tracking — mortgage interest recorded correctly for the tax credit
- Automatic tax credit calculation — shows exactly how much relief you receive
- Real-time tax impact — see Section 24's effect on your liability
- What-if scenarios — model incorporation or other changes
- MTD-ready — quarterly submissions include correct Section 24 treatment
- SA105 filing — submits your property return directly to HMRC
Start your free 30-day trial and understand your Section 24 position.
Summary
Section 24 replaced full mortgage interest deductions with a 20% tax credit for residential landlords. The change particularly affects higher rate and additional rate taxpayers, who previously received relief at 40% or 45%.
| Taxpayer Type | Section 24 Impact | |---------------|-------------------| | Basic rate (20%) | Minimal—credit matches old relief | | Higher rate (40%) | Significant—loses 20% of interest value | | Additional rate (45%) | Maximum—loses 25% of interest value |
Consider your options: incorporation, paying down mortgages, spousal transfers, or accepting the higher tax burden. Consult an accountant for significant property portfolios.
Learn more in our Landlord Tax Guide.