Section 24: How the Mortgage Interest Tax Change Affects Landlords

Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how UK landlords are taxed on rental income. Fully phased in since 2020, it remains the single biggest tax hit for higher-rate taxpaying landlords with mortgaged properties.

This guide explains what changed, who is affected, and what options landlords have used to manage the impact.

What Section 24 Does

Before Section 24, landlords could deduct all mortgage interest (and other finance costs) as a business expense before calculating taxable profit. This meant:

Old system:

• Rental income: £18,000
• Mortgage interest: £12,000
• Taxable profit: £6,000
• Tax (at 40%): £2,400

Under Section 24, you can no longer deduct mortgage interest as an expense. Instead, you get a basic rate tax credit equal to 20% of your finance costs.

New system:

• Rental income: £18,000
• Taxable profit: £18,000 (full amount)
• Tax (at 40%): £7,200
• Less: 20% credit on finance costs (20% × £12,000 = £2,400)
• Net tax: £4,800

That’s £2,400 more in tax for the same property, the same income, and the same mortgage. For higher-rate taxpayers with large mortgages, the difference can turn a nominally profitable portfolio into a cash-flow loss after tax.

Who Is Affected

Section 24 only affects:

• Individual landlords (not companies) who pay income tax at 40% or 45%
• Landlords with mortgaged residential properties

If you pay basic rate income tax (20%), you are largely unaffected — the 20% credit cancels out the 20% tax on finance costs.

Section 24 does not apply to:

• Limited companies — companies still deduct finance costs as business expenses
• Commercial property
• Furnished holiday lettings (FHL) — though the FHL regime was abolished in April 2025

The Ripple Effect: Fiscal Drag

A subtler impact of Section 24 is fiscal drag. Because your full rental income is now counted as taxable income before deductions, it can push you into a higher tax bracket — or affect other income-related calculations such as the High Income Child Benefit charge or personal allowance withdrawal.

For example, a landlord with £50,000 salaried income and £18,000 rental income may find that the entire rental income is now taxed at 40% because mortgage interest no longer reduces the rental profit — even if their cash position doesn’t justify that rate.

What Landlords Have Done

Incorporation

The most discussed response to Section 24 has been transferring rental properties into a limited company. Companies pay corporation tax (currently 25% for profits over £250k, 19% for smaller profits) and can deduct finance costs in full.

However, transferring a property into a company typically triggers:

• Capital Gains Tax (CGT) on the market gain since purchase (unless SDLT Partnership relief applies)
• Stamp Duty Land Tax (SDLT) on the market value at transfer
• Legal and accountancy fees for the restructuring

For most landlords with modest portfolios, incorporation costs outweigh the tax saving. It is worth modelling carefully with an accountant.

Remortgaging to reduce LTV

Some landlords have prioritised paying down mortgage balances to reduce the interest that attracts reduced relief. Lower LTV also improves refinancing rates.

Selling high-interest properties

Where individual properties are cash-flow negative after tax under Section 24, some landlords have disposed of them — particularly those with high LTV mortgages and modest rents.

Raising rents

To offset the additional tax burden, some landlords have increased rents. This has real limits in high-demand markets but partially compensates in others.

Joint ownership and income shifting

Married couples and civil partners can sometimes shift rental income to the lower-rate taxpayer by adjusting property ownership proportions (using HMRC Form 17 for beneficial interest declarations). This requires genuine restructuring of ownership, not just a declaration.

Allowable Expenses Still Available

While mortgage interest deduction is gone, other legitimate expenses remain deductible:

• Letting agent fees
• Property insurance premiums
• Maintenance and repair costs (not improvements)
• Accountancy fees
• Ground rent and service charges
• Utility bills (if paid by the landlord)
• Wear and tear / replacement of furnishings

Keeping thorough expense records is more important than ever. Every allowable deduction you miss is additional profit taxed at your marginal rate.

Record Keeping for HMRC

HMRC increasingly scrutinises landlord tax returns. You should retain:

• Mortgage statements showing interest payments (separate from capital repayment)
• Receipts for all deductible expenses
• Tenancy agreements showing rent amounts
• Rent ledger showing actual receipts

Making Tax Digital (MTD) for Income Tax will apply to landlords with rental income above £50,000 per year from April 2026, and to those above £30,000 from April 2027. Under MTD, you will need to submit quarterly updates to HMRC via compatible software. HMRC will eventually require electronic submission for all self-employed individuals and landlords.

What to Do Now

1. Model your tax position: Use a spreadsheet or work with an accountant to calculate your actual after-tax cash flow under Section 24. Don’t rely on nominal profit figures.

2. Track every expense: PropLedger’s expense tracker records maintenance, insurance, and agency fees by property. Export to CSV at year-end for your accountant.

3. Record mortgage interest separately: Make sure your accountant can distinguish finance costs from capital repayment — your mortgage statement will show this.

4. Review your structure with a specialist: If you have a growing portfolio or high mortgage leverage, a tax specialist can model whether incorporation makes sense for your specific situation.

Section 24 is the law, and it isn’t going away. The landlords who manage it best are the ones who know their numbers, claim every legitimate deduction, and plan their portfolio decisions with the tax consequence in mind.