Restriction of tax relief on mortgage interest – Section 24


In his budget on 8th July 2015, the then chancellor George Osbourne, announced a measure to restrict the tax relief on mortgage interest to 20%, for individuals. Now commonly referred to as ”section 24” (Section 24 of the Finance (no. 2) Act 2015) the measure has had a major impact on existing landlords and new investors alike.

As a result, one of the most common questions I get asked is, can I still claim mortgage interest? The answer is :-

  • if you are a lower rate taxpayer, with one exception, you still get full tax relief.
  • If you are a higher rate or top rate taxpayer, you still get tax relief but this is restricted to 20% of the interest and is given as a tax credit.


So how did the measure change things?



Up until April 2017, you could deduct your mortgage interest (plus associated costs like arrangement fees) along with all your other costs such as repairs, insurance, letting agent fees etc, before determining your taxable profit.


£15,000 rental income

£5,000 mortgage interest costs

£2,000 other costs

= £8,000 profit


You would then pay tax on that profit at your marginal rate:-

A basic rate (currently 20%) taxpayer would pay tax of £1600

A higher rate (currently 40%) taxpayer would pay £3200

A Top rate (currently 45%) taxpayer would pay £3600



The interest restriction has been phased in over 4 years with 25% of the interest being restricted each year. The new measure will have fully taken effect in April 2020. You will no longer be able to deduct mortgage interest costs from your taxable profits if the property is owned by an individual. (If the property is owned as a company, you continue under the old rules and none of this applies.)

Instead, everyone will be able to claim a basic rate allowance for their finance costs — irrespective of their marginal rate.

Example using the same figures as above and see how things have changed:

£15,000 rental income

£2,000 other costs

= £13,000 profit

[£5,000 mortgage interest costs no longer given as a direct cost


So now, your tax before you are given tax relief at 20% on the interest would be:

A basic rate (currently 20%) taxpayer would pay tax of £2600

A higher rate (currently 40%) taxpayer would pay £5200

A Top rate (currently 45%) taxpayer would pay £5850

But everyone gets to claim a basic rate deduction of 20% of that £5,000 mortgage interest cost. That’s £1,000.


So the final position is…

Basic rate taxpayer:

20% tax on £13,000 profit = £2,600

Minus £1,000 deduction (20% of £5,000 interest cost)

= £1,600 tax to pay.

Higher rate taxpayer:

40% tax on £13,000 profit = £5,200

Minus £1,000 deduction (20% of £5,000 interest cost)

= £4,200 tax to pay

Top rate taxpayer:

45% tax on £13,000 profit = £5,850

Minus £1,000 deduction (20% of £5,000 interest cost)

= £4,850 tax to pay


What has happened?

Two things.

Firstly, you will notice that the basic rate taxpayer ends up paying exactly the same amount of tax under the new system: £800. The higher rate taxpayer, however, ends up paying £1,000 more and the top rate taxpayer £1250 more.

But this doesn’t mean that the basic rate taxpayer is unaffected. Because the deduction is applied after calculating the taxable profit, everyone’s “profit” has actually increased — from £4,000 to £9,000.

This means that people whose income (from property plus employment and any other sources) is currently below the higher rate threshold may end up getting pulled into the higher rate band as a result of their higher property “profits”.


What can you do about it? 

The starting point should always be to work out the effect that the change has had on your tax position. In many cases, the effect is actually quite small and does not warrant any further action especially when taking into consideration factors such as the one off costs of a restructure.

Following on from this you could look at the following :-

  1. Do nothing. If the changes result in only a minor increase in costs, the chances are that it will not be worthwhile doing anything.
  1. Sell some or all of your properties and re-invest the proceeds into a limited company property structure. You will need to consider any capital gains tax as a result.
  1. If you are married or in a civil partnership and one of you is a lower rate taxpayer, consider a transfer of the beneficial ownership into the name of the lower rate partner.
  1. Consider a transfer of the properties into a limited company or an LLP (Limited Liability Partnership). There has been much written about this. The important things to bear in mind are that you need to consider the following:-


Finance costs

What are the re-finance costs of transferring ownership to a limited company.

Apart from the costs of refinancing such as arrangement fees and higher interest rates, this is a topic which generates a lot of discussion. Mostly, this is centred around the use of a declaration of trust to transfer the beneficial ownership to the limited company.

I strongly advise that if you are contemplating this that you speak to any lender/mortgage provider in situ first and seek clearance from them to the extent that they are happy to accept such a transfer, and not just the word of any so called expert/ tax adviser.

If you have signed terms and conditions with a lender any variation should be with the agreement of the lender. Do NOT be persuaded by anyone who tells you that there is no need to involve the lender.

My advice, if this is what you have been told, is to ask the adviser to get clearance in any case. After all if there is no problem with what they are proposing, surely the lender will not object! It is your name on the mortgage offer so you need to be confident that you are not breaking the terms, don’t you?

Capital gains tax

Any transfer from yourself to a limited company will need to be looked at from a capital gains tax perspective. A transfer from you to a limited company, even one that is owned entirely by you, is regarded as a sale at market value.

Stamp duty land tax

A transfer from yourself to a limited company will attract SDLT payable by the limited company.


© Thandi Nicholls Ltd 2020 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.


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