Section 24 of the Finance Act 2015 restricted the ability of individual landlords to deduct mortgage interest from rental income before calculating their tax liability. Fully phased in since 2021, it remains one of the most significant changes to the economics of individual buy-to-let ownership in recent decades, and many landlords still haven’t properly modelled what it costs them.
What changed
Before Section 24, landlords could deduct their full mortgage interest from rental income, reducing the taxable profit. Under the current rules, mortgage interest is not deductible from income. Instead, you receive a 20% tax credit on the interest paid. This is neutral for basic rate taxpayers but significantly increases the tax bill for higher and additional rate taxpayers.
A worked example
Consider a higher-rate taxpayer with a property renting for £15,000 per year and mortgage interest of £8,000 per year. Under the old rules, taxable profit would have been £7,000, with 40% tax due of £2,800. Under Section 24, taxable profit is £15,000 (before other allowable deductions), with 40% tax of £6,000, minus the 20% credit of £1,600, leaving a tax bill of £4,400. That’s an extra £1,600 per year on a single property.
For landlords with multiple leveraged properties, the cumulative impact is substantial. In some cases, Section 24 has turned nominally profitable portfolios into loss-making ones on a cash basis.
Does incorporation help?
Limited companies are not subject to Section 24, they can still deduct mortgage interest as a business expense. This has driven significant interest in portfolio incorporation, but the decision is not straightforward. Transferring properties into a company typically triggers a disposal for CGT purposes, and higher stamp duty rates apply on acquisition. The long-term tax savings need to outweigh the upfront costs.
For new acquisitions, many higher-rate investors now buy through a limited company from the outset. For existing portfolios, the case depends heavily on individual circumstances. Always seek advice from a specialist property tax accountant before making any structural changes.
The bottom line
If you’re a higher or additional rate taxpayer with leveraged residential properties held personally, Section 24 is costing you money every year. Quantifying that cost is the first step to deciding whether restructuring makes sense.