Mortgage Interest Tax Relief for Landlords: How Section 24 Works and What You Can Do About It

For many landlords in the UK, the change to mortgage interest tax relief has been the single biggest factor pushing up their tax bills over the past decade. This sits within the wider Income Tax framework covered in our ultimate guide to personal tax in the UK. If you own a buy-to-let property personally and have a mortgage on it, this article explains how the current rules work, why they affect higher-rate taxpayers so significantly, and what planning options are available.

The Old System: Full Deduction (Pre-April 2020)

Before April 2017, individual landlords could deduct 100% of their mortgage interest from their rental income before calculating their taxable profit. This meant that if you paid £10,000 a year in mortgage interest and earned £18,000 in rent, you were only taxed on £8,000 of profit.

For higher-rate taxpayers, this was particularly valuable. A 40% taxpayer with £10,000 of mortgage interest effectively saved £4,000 in tax – because the deduction reduced their taxable income at their marginal rate.

The New System: The Section 24 Tax Credit (Since April 2020)

Section 24 of the Finance Act 2015 phased out the full interest deduction between 2017 and 2020, fundamentally reshaping rental business mortgage relief for individual landlords. Since April 2020, they can no longer deduct mortgage interest from their rental income at all. Instead, they receive a tax credit equal to 20% of their mortgage interest costs, applied against their tax bill after it is calculated.

This is a fundamental change. Under the old system, the deduction reduced taxable income. Under the current system, the rental income is taxed in full (minus other allowable expenses), and the 20% credit is then deducted from the tax bill.

Why This Hurts Higher-Rate Taxpayers

For basic rate taxpayers, the net effect of Section 24 is broadly the same as before – they pay 20% tax on their profit and receive a 20% credit for the interest, which largely cancels out.

For higher and additional rate taxpayers, the impact is significant. Here is a worked example:

A landlord earns £20,000 in rental income and pays £12,000 in mortgage interest. Their other allowable expenses are £2,000. They also have employment income that puts them in the 40% tax band.

Under the old system:

Rental income: £20,000
Less mortgage interest: £12,000
Less other expenses: £2,000
Taxable profit: £6,000
Tax at 40%: £2,400

Under the current Section 24 system:

Rental income: £20,000
Less other expenses: £2,000
Taxable profit: £18,000
Tax at 40%: £7,200
Less 20% credit on £12,000 interest: £2,400
Net tax on rental income: £4,800

The same landlord now pays £4,800 instead of £2,400 – double the tax bill, with no change in their actual rental income or costs. This makes it even more important to claim every other allowable cost correctly our broader roundup of tax deductions landlords should know about covers the full range of expenses that remain fully deductible.

Other Consequences to Be Aware Of

Because Section 24 inflates taxable rental income without a corresponding deduction, it can push landlords into higher income bands even if their actual rental profit is modest. This has two important knock-on effects.

First, if your taxable income (now including the gross rental income without interest deducted) exceeds £60,000, you may become liable for the High Income Child Benefit Charge if you or your partner claims Child Benefit. This can add further unexpected tax costs.

Second, if your rental profits in a given year are not sufficient to absorb the full 20% credit, the unused finance costs can be carried forward to the next tax year. They are not lost, but they do not reduce your current year’s bill below zero. For landlords with smaller rental portfolios, it may also be worth checking whether the tax-free property allowance for landlords offers a simpler alternative altogether.

What About Limited Companies?

Section 24 applies only to individual landlords and partnerships. Properties held through a limited company are not subject to the restriction. Section 24 also doesn’t apply where you’re simply letting a room in your own home rather than running a separate rental property, in which case tax-free income from letting a room in your home may be more relevant. A company can still deduct 100% of its mortgage interest as a business expense before calculating its taxable profit, which it then pays corporation tax on at either 19% or 25% (depending on the level of profits).

For landlords with larger portfolios or higher income levels, incorporation can be a meaningful tax planning option. However, it is not straightforward. Transferring personally owned properties into a company is treated as a disposal for CGT purposes, potentially triggering an immediate CGT charge. Stamp Duty Land Tax (SDLT) is also due on the transfer. Running a company adds ongoing administration and compliance costs.

Whether incorporation makes sense depends on your individual circumstances – the size of your portfolio, your mortgage levels, your other income, and your long-term plans for the properties. This is an area where specialist advice is essential before acting. Decisions of this scale are best considered as part of a broader effort to maximise your rental property ROI through effective tax planning strategies, rather than viewed in isolation.

Key Takeaways

• Since April 2020, individual landlords can no longer deduct mortgage interest from rental income
• Instead, they receive a 20% basic rate tax credit on their mortgage interest costs
• Higher and additional rate taxpayers pay significantly more tax than before the change
• The credit is applied against your tax bill after it is calculated – it does not reduce your taxable rental income
• Unused finance costs can be carried forward if profits are insufficient to use the credit in full
• Properties held through a limited company are not subject to Section 24 – full interest deduction remains available
• Incorporation may be worth exploring but requires careful analysis of CGT, SDLT, and ongoing costs

Separately from the mortgage interest restriction, landlords replacing items such as furniture or appliances between tenancies should also be aware of replacement of domestic items relief.

Mortgage Interest Tax Relief Case Study

James, an experienced buy-to-let landlord, visited our Farringdon office after noticing that his Income Tax bill had risen sharply, even though his rental income and mortgage costs had remained largely unchanged. He had heard about Section 24 mortgage interest tax relief but did not fully understand why it had such a significant impact on his tax position. We explained how the current rules differ from the previous system and reviewed how the changes affected his rental business.

After analysing James’s rental income, finance costs and wider taxable income, we showed him that his mortgage interest could no longer be deducted when calculating taxable rental profits. Instead, he was entitled to a 20% basic-rate tax reduction on qualifying finance costs. As a higher-rate taxpayer, this meant his taxable rental income was substantially higher than under the previous rules. We also reviewed whether any unused finance costs could be carried forward and assessed how the increased taxable income could affect other areas of his tax position, including the High Income Child Benefit Charge.

Finally, we discussed long-term planning options, including whether holding future rental properties through a limited company might be appropriate, while outlining the Capital Gains Tax, SDLT and administrative implications before making any decisions.

By the end of the consultation, James understood how Section 24 operated, why his tax bill had increased and how to plan his property portfolio more efficiently while remaining fully compliant with HMRC requirements.