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. 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. Since April 2020, individual landlords who let residential property 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.

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.

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. 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.

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

Get Help Mitigating the Impact of Mortgage Interest Restrictions

At Cigma Accounting, we help landlords across London understand how mortgage interest relief works under current tax rules, so they can manage rental income and tax liabilities with clarity. From Fulham Broadway, including Brompton Cemetery and West Brompton, many property owners are unsure how finance cost restrictions affect their returns, which is why our guidance focuses on practical, real-world application rather than theory.

Changes to mortgage interest relief can significantly impact net rental profits and overall tax position, particularly for higher-rate taxpayers. With physical offices across London, we support landlords in structuring their finances carefully, ensuring calculations are accurate and fully aligned with HMRC requirements.