⚠️ Section 24 Status in 2025
Since April 2020, no mortgage interest can be deducted from rental income. Instead, landlords receive a basic rate (20%) tax reduction on their Income Tax liability. This restriction applies to all individual residential property investors.
What is Section 24?
Section 24 of the Finance (No. 2) Act 2015 introduced legislation restricting mortgage interest relief for residential property investors. The government's stated aim was to "make the tax system fairer" and "ensure that landlords with higher incomes no longer receive the most generous tax treatment."
Key Changes
- No expense deduction: Mortgage interest cannot be deducted when calculating property profits
- Basic rate relief only: Instead, receive 20% tax reduction against Income Tax liability
- Applies to individuals only: Limited companies can still deduct mortgage interest as an expense
- Residential properties only: Commercial and furnished holiday lettings were exempt (until April 2025 for FHLs)
How Section 24 Works in Practice
Before vs After Section 24
Before Section 24 (Pre-2017)
- Mortgage interest deducted from rental income
- Reduced taxable profit
- Tax relief at marginal rate (20%, 40%, or 45%)
- Lower overall tax bills for higher rate taxpayers
After Section 24 (2020 onwards)
- Mortgage interest NOT deducted from rental income
- Higher taxable profit
- Tax relief fixed at basic rate (20%)
- Increased tax bills for all rate taxpayers
Tax Reduction Calculation
The basic rate tax reduction is calculated as 20% of the lowest of:
- Finance costs not deducted from rental income in the tax year
- Property business profits after using any brought forward losses
- Adjusted total income that exceeds your personal allowance (excluding savings and dividends)
Worked Examples: Section 24 Impact
Example 1: Basic Rate Taxpayer
Sarah - Single Property Landlord
- Employment income: £30,000
- Rental income: £12,000
- Property expenses (exc. mortgage): £2,000
- Mortgage interest: £6,000
Before Section 24:
- Taxable rental profit: £12,000 - £2,000 - £6,000 = £4,000
- Total taxable income: £30,000 + £4,000 = £34,000
- Tax on rental profit: £4,000 × 20% = £800
After Section 24 (2025):
- Taxable rental profit: £12,000 - £2,000 = £10,000
- Total taxable income: £30,000 + £10,000 = £40,000
- Tax on rental profit: £10,000 × 20% = £2,000
- Tax reduction: £6,000 × 20% = £1,200
- Net additional tax: £2,000 - £1,200 = £800
Result: Sarah pays £800 more tax annually due to Section 24.
Example 2: Higher Rate Taxpayer
James - Multiple Property Portfolio
- Employment income: £60,000
- Rental income: £30,000
- Property expenses (exc. mortgage): £5,000
- Mortgage interest: £18,000
Before Section 24:
- Taxable rental profit: £30,000 - £5,000 - £18,000 = £7,000
- Total taxable income: £60,000 + £7,000 = £67,000
- Tax on rental profit: £7,000 × 40% = £2,800
After Section 24 (2025):
- Taxable rental profit: £30,000 - £5,000 = £25,000
- Total taxable income: £60,000 + £25,000 = £85,000
- Tax on rental profit: £25,000 × 40% = £10,000
- Tax reduction: £18,000 × 20% = £3,600
- Net additional tax: £10,000 - £3,600 = £6,400
Result: James pays £6,400 more tax annually - a massive increase pushing him further into higher rate tax.
Who is Affected by Section 24?
Properties Covered
| Property Type | Section 24 Applies? | Notes |
|---|---|---|
| Residential buy-to-let | ✅ Yes | Main target of the legislation |
| Houses in Multiple Occupation (HMOs) | ✅ Yes | Treated as residential property |
| Furnished Holiday Lettings | ❌ No (until April 2025) | FHL rules abolished from April 2025 |
| Commercial property | ❌ No | Business property rules still apply |
| Properties in limited companies | ❌ No | Corporation tax rules - interest still deductible |
Finance Costs Included
Section 24 applies to:
- Mortgage interest on loans to purchase residential property
- Interest on loans to buy furnishings for rental properties
- Arrangement fees for mortgages and loans
- Early repayment charges on mortgages
- Alternative finance costs (Islamic finance arrangements)
Strategies to Cope with Section 24
1. Limited Company Structure
How it Works:
Transfer properties to a limited company to benefit from corporation tax rules where mortgage interest remains fully deductible.
Benefits:
- Full mortgage interest deduction
- Corporation tax rates: 19% (profits up to £50k) or 25% (over £250k)
- Better cash flow and reinvestment opportunities
Drawbacks:
- Stamp Duty Land Tax on transfer (3% surcharge)
- Capital Gains Tax on transfer (unless incorporation relief applies)
- Double taxation on dividends
- Additional compliance costs
2. Rent-a-Room Relief
How it Works:
If you rent out a room in your main residence, the first £7,500 annually is tax-free under rent-a-room relief.
Benefits:
- Complete tax exemption on income up to £7,500
- No Section 24 restrictions
- Simple to implement
Considerations:
- Must be in your main residence
- Furnished accommodation only
- Cannot claim expenses if using the relief
3. Property Allowance Optimization
How it Works:
For small-scale landlords, the £1,000 property allowance might provide better tax treatment than claiming actual expenses.
When to Use:
- Total rental income under £2,000
- Property expenses (excluding mortgage interest) under £1,000
- Want to simplify record keeping
Important:
If you claim property allowance, you cannot deduct any expenses, including mortgage interest.
4. Portfolio Restructuring
Options Include:
- Reduce gearing: Pay down mortgages to reduce interest costs
- Sell loss-making properties: Focus on profitable assets
- Switch to commercial property: Where full interest deduction remains
- Invest in REITs: Property exposure without direct ownership
Advanced Tax Planning Strategies
Carrying Forward Finance Costs
If you cannot use all your tax reduction in one year (because you don't have enough tax liability), unused finance costs can be carried forward indefinitely.
Example: Carry Forward Scenario
- Annual mortgage interest: £8,000
- Property profits: £3,000
- Other income: £15,000 (within personal allowance after pension contributions)
- Tax liability: £0
- Carried forward finance costs: £8,000 × 20% = £1,600
Timing of Disposals
Consider the timing of property sales to utilise carried forward finance costs:
- Sell properties in years with high tax liabilities
- Use carried forward finance costs to reduce Capital Gains Tax
- Coordinate with other income sources
Spouse/Civil Partner Planning
Joint Ownership Benefits:
- Split income to utilise both personal allowances
- Keep one spouse in basic rate tax band
- Double property allowances (£1,000 each)
- Utilise both Capital Gains Tax allowances on sale
Important:
Joint tenants automatically split income 50:50. Tenants in common can elect different splits if legally held in different proportions.
Record Keeping for Section 24
Essential Records
- Mortgage statements: Showing interest paid annually
- Loan documentation: Proving property investment purpose
- Property expenses: All allowable costs except finance costs
- Rental income records: Tenancy agreements, rent receipts
- Carried forward calculations: Unused finance cost relief
Self Assessment Reporting
On your Self Assessment return:
- Report rental income in full
- Deduct allowable expenses (excluding finance costs)
- Report finance costs separately for basic rate relief calculation
- Claim carried forward finance costs from previous years
Future Planning Considerations
Market Changes
Section 24, combined with other regulatory changes, has impacted the buy-to-let market:
- Reduced demand from individual investors
- Increased corporate ownership
- Higher rents to maintain profitability
- Greater focus on capital growth over income
Potential Future Changes
While Section 24 is established policy, consider:
- Possible further restrictions on property tax reliefs
- Changes to corporation tax rates affecting company structures
- Capital Gains Tax reforms impacting disposal strategies
- Additional property taxes or regulations
When to Seek Professional Advice
Consider specialist property tax advice if:
- Your property portfolio generates over £50,000 annual income
- You're considering incorporation or structural changes
- You have significant carried forward finance costs
- You're planning major property acquisitions or disposals
- Your total tax bill has increased significantly due to Section 24
- You're considering commercial property investment
Minimise Your Section 24 Tax Impact
Our property tax specialists help landlords navigate Section 24 restrictions and implement tax-efficient strategies. Book a consultation to review your portfolio and identify opportunities to reduce your tax burden.