Section 24 Explained: How Mortgage Interest Relief Was Removed and What Landlords Pay Now

What Is Section 24?

Section 24 of the Finance (No. 2) Act 2015, announced by Chancellor George Osborne in the July 2015 Budget, is the provision that phased out the ability of individual landlords to deduct mortgage interest as a business expense when calculating their taxable rental profit.

Before Section 24, a landlord with rental income of £20,000 per year and mortgage interest of £12,000 per year would pay income tax on a profit of £8,000. After Section 24, the same landlord pays income tax on the full £20,000 of rental income, and instead receives a tax credit of 20% of the mortgage interest paid (£2,400 in this example). For basic rate taxpayers, the net tax position is broadly similar. For higher and additional rate taxpayers, the change significantly increases the tax bill.

The Phased Transition (2017–2020)

Section 24 was phased in gradually over four tax years:

From April 2020, no mortgage interest can be deducted from rental income. All finance costs (mortgage interest, arrangement fees, any other finance costs related to the letting) are instead used to compute a tax credit at the basic rate of 20%, which is set against the landlord's income tax liability.

Who Is Affected?

Section 24 applies to individual landlords (including those jointly letting property) who own residential property in their own names. It does not apply to:

• **Landlords holding property through a limited company.** Companies continue to deduct mortgage interest as a business expense and pay corporation tax on net profit. This is the primary reason many landlords have incorporated their portfolios since 2017.
• **Commercial property landlords.** Section 24 is specific to residential lettings.
• **Furnished holiday let landlords (until April 2025).** The FHL regime exempted qualifying properties from Section 24, but the abolition of FHL status from April 2025 has brought these properties into the Section 24 net.

Calculating the Real Impact

The impact of Section 24 depends on the landlord's marginal income tax rate and the ratio of mortgage interest to rental income (the "interest cover ratio").

Consider a higher rate taxpayer (40%) with:

• Annual rental income: £18,000
• Annual mortgage interest: £10,000

**Pre-Section 24 calculation:**

• Profit: £18,000 − £10,000 = £8,000
• Tax at 40%: £3,200

**Post-Section 24 calculation:**

• Taxable rental income: £18,000 (no deduction for interest)
• Tax at 40%: £7,200
• Less tax credit: 20% × £10,000 = £2,000
• Net tax liability: £5,200

The tax bill has increased from £3,200 to £5,200 — a rise of £2,000 per year — on the same economic activity. For heavily mortgaged landlords at higher rate, the increase can make a previously profitable property loss-making on a post-tax basis.

The "Phantom Profit" Problem

Section 24 can also push landlords into higher income tax bands. Because mortgage interest is no longer deducted before calculating taxable income, a landlord whose total income (salary + rental receipts) crosses the £50,270 higher rate threshold appears to earn more than they actually do in cash terms. This can reduce or eliminate eligibility for the personal savings allowance, child benefit, pension annual allowance taper, and other income-tested reliefs.

Incorporation: Does It Solve the Problem?

Many landlords have transferred properties to limited companies to escape Section 24. Within a company, mortgage interest remains fully deductible. The company pays corporation tax on net profit (currently 19–25% depending on profit level). However, incorporation carries significant one-off costs and tax triggers:

• **Stamp Duty Land Tax:** Transferring property to a company is treated as a sale at market value. SDLT (including the 3% additional dwelling surcharge) is payable by the company on acquisition. For a property portfolio worth £500,000, this can represent a substantial upfront cost.
• **Capital gains tax:** The transfer may crystallise capital gains tax on unrealised gains accrued since purchase. Incorporation relief under section 162 TCGA 1992 may be available if the property activity constitutes a trade rather than an investment — a test that requires professional advice.
• **Extracting profits:** Profits within a company are subject to corporation tax. Extracting them as dividends incurs further tax at dividend rates. The combined effective rate can exceed 40% for director-shareholders.

Incorporation is not automatically the right answer for every landlord. The decision requires detailed modelling of the upfront costs against the long-term tax saving. Specialist landlord accountant advice is essential.