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If you own a residential rental property in your own name and have a mortgage on it, Section 24 is probably the single most important piece of tax legislation affecting your finances. Yet despite being fully in force since April 2020, it continues to catch landlords off guard — particularly those who have not reviewed their tax position since the rules changed. This article explains what Section 24 does, how it affects your tax bill in practice, and what options are available to landlords who are feeling the squeeze.
If you own a residential rental property in your own name and have a mortgage on it, Section 24 is probably the single most important piece of tax legislation affecting your finances. Yet despite being fully in force since April 2020, it continues to catch landlords off guard — particularly those who have not reviewed their tax position since the rules changed. This article explains what Section 24 does, how it affects your tax bill in practice, and what options are available to landlords who are feeling the squeeze.
Section 24 refers to provisions introduced by the Finance (No. 2) Act 2015, which fundamentally changed the way individual landlords receive tax relief on their mortgage interest and other finance costs. Before the changes were phased in between 2017 and 2020, landlords could deduct mortgage interest directly from their rental income before calculating their taxable profit. That meant a higher-rate taxpayer with £20,000 of rental income and £12,000 of mortgage interest would pay tax on £8,000 of profit — a straightforward and intuitive calculation.
Section 24 has removed that deduction in its entirety for individual landlords. Instead, landlords now get a basic rate tax cut worth 20% of their finance charges. At first glance, it could be an insignificant tweak. It is, in fact, a huge uplift on the same rental income for those paying higher and additional rates.
To understand the real impact, it helps to work through a concrete example. Suppose you are a higher-rate taxpayer with £20,000 of rental income and £12,000 of mortgage interest in the 2025/26 tax year.
Under the old rules, you would have deducted the £12,000 interest from your rental income, leaving a taxable profit of £8,000. At 40%, your tax bill on the rental income would have been £3,200.
Under Section 24, you cannot make that deduction. Your taxable rental income is the full £20,000 (less any allowable expenses other than finance costs). Assuming no other deductible expenses, you pay 40% tax on £20,000, which is £8,000. You then receive a tax reduction of 20% of your finance costs — 20% of £12,000 is £2,400. Your net tax bill on the rental income is therefore £8,000 minus £2,400, which is £5,600. That is £2,400 more than under the old rules, on exactly the same underlying income and costs.
For an additional rate taxpayer, the disparity is even greater. And critically, the tax reduction is always fixed at 20% regardless of your marginal rate — so the higher your tax rate, the larger the gap between what you receive and what you would have received under the old system.
The effect of Section 24 is not as simple as calculating the tax, and this is what many landlords are truly caught out by. Mortgage interest will no longer be deducted from your rental income, this will increase your total income even if you have the same amount of cash in the bank.
This matters for several reasons. If your adjusted net income exceeds £100,000, your personal allowance begins to taper at a rate of £1 for every £2 of income above that threshold. By the time your income reaches £125,140, your personal allowance is gone entirely. The effective marginal tax rate in this band is 60%, and Section 24 can push landlords into it who would not otherwise be there. A landlord with £90,000 of employment income and £20,000 of rental income (before deducting mortgage interest of £15,000) might previously have had an adjusted net income of £95,000 — comfortably below the taper. Under Section 24, their adjusted net income is £110,000, and they lose £5,000 of personal allowance, creating an additional tax cost that has nothing to do with the rental profit itself.
The same applies for the High Income Child Benefit Charge which is relevant if adjusted net income is above £60,000. If a landlord is receiving child benefit and their income is near to the threshold amount, they could end up in a charge they would not have been in if they hadn’t received the child benefit. Other factors such as student loan repayments, annual allowance for pensioners and eligibility for some tax credits can also be impacted.
Section 24 applies to individual landlords and to partnerships where the partners are individuals. It does not apply to companies. A limited company can still deduct mortgage interest as a business expense in the normal way, paying corporation tax only on its net profit after finance costs. This is the primary reason why incorporation has become such a widely discussed strategy for portfolio landlords since 2017.
The restriction also only applies to residential lettings and not commercial property. Also it should be noted the previous Section 24 exemption for ‘furnished holiday lettings’ has ceased to apply from April 2025. Previously landlords running a furnished holiday let were entitled to this exemption and are now subject to the standard rules for landlords of residential property and are subject to the full Section 24 restriction.
Section 24 poses an awkward situation for landlords where their annual rental income (excluding finance costs) is less than their finance costs. The property business may record a profit for tax purposes even if the landlord is cash flow negative, as the finance costs are not deducted from the investments. Not a theoretical edge case; it will impact a lot of highly leveraged landlords, especially those who overpaid for properties at the market top with substantial mortgages.
Where the tax reduction cannot be fully utilised in a given year, because the property profits or adjusted total income are insufficient, the unused finance costs are not lost. They can be carried forward to future tax years and used when sufficient income is available. However, this carry-forward must be actively tracked and claimed; it does not happen automatically, and many landlords are unaware of it.
For landlords with larger portfolios or higher marginal tax rates, incorporation — transferring the rental properties into a limited company — is often the most effective long-term response to Section 24. A company pays corporation tax at 19% (or 25% for profits above £250,000) and can deduct mortgage interest in full, which can produce a substantially lower tax bill on the same rental income.
Incorporation isn’t a straightforward or inexpensive solution, though. Gifting or transferring the property from personal to company ownership is treated as a capital gains tax (CGT) disposal and may result in a substantial CGT bill. SDLT will also be payable at the additional property rates and will be based on the market value of the property at the time of the transfer. Whether incorporation is financially beneficial will depend on the size of the portfolio, the amount of mortgage debt, the initial costs of the properties, and the long-range plans of landlords, such as whether they will extract income from the company or invest in it.
Whereas for others, the tax drag caused by the Section 24 will be greater than the one-off costs of incorporation and therefore will be a disadvantage to the landlord. Others, especially if they have a small mortgage or if their home is appreciating rapidly, may not see a return on the numbers. The important thing is to develop the position correctly and not on a hunch that incorporation is always the solution.
If you have not reviewed your tax position in light of Section 24, the starting point is to understand exactly how the restriction is affecting your current tax bill. That means calculating your rental income and allowable expenses, identifying your total finance costs, and working out the tax reduction you are entitled to, including any carry-forward from previous years. From there, you can model the impact on your adjusted net income and identify whether you are being caught by any of the secondary effects discussed above.
It is also worth reviewing the amount of any borrowing secured against your rental properties. If you have remortgaged to an amount that exceeds the value of the property when it was introduced to the property business, the mortgage interest on that portion may not qualify for the tax credit.
Finally, if your portfolio has grown or your personal income has changed significantly since you last reviewed your structure, it is worth considering whether your current ownership structure remains the most tax-efficient one, not just in terms of Section 24, but taking into account CGT, SDLT, IHT and your longer-term succession planning.
Section 24 has fundamentally changed the economics of leveraged residential property investment for individual landlords. By replacing a full deduction for mortgage interest with a basic rate tax reduction, it has increased the effective tax burden on higher and additional rate taxpayers, sometimes dramatically. The impact extends beyond the headline tax calculation, affecting adjusted net income, the personal allowance taper, child benefit, and a range of other income-related thresholds.
Understanding how Section 24 affects your specific position is the essential first step. From there, the options range from reviewing your finance cost claims and carry-forwards to restructuring your portfolio through incorporation. None of these decisions should be made without a clear picture of the numbers, and the right answer will be different for every landlord depending on their individual circumstances.
This article is for general information purposes. UK Landlord Tax provides specialist tax advice for landlords across the UK. For tailored advice on your specific circumstances, get in touch with our team.
Simon Thandi
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
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