UK Landlord Tax Optimization Guide - Part 3: Section 24 & Mortgage Interest
Written: June 3rd, 2025
Building on Parts 1 and 2's foundation of core obligations and expense optimization, Part 3 tackles one of the most significant changes to affect UK residential landlords in recent years: Section 24 of the Finance (No. 2) Act 2015. Understanding how these mortgage interest restrictions work is crucial for maintaining profitable property investments and making informed decisions about your portfolio structure.
Navigating Section 24: Mortgage Interest Tax Relief Changes
Section 24, fully implemented from April 2020, has fundamentally changed how landlords can claim tax relief for finance costs, primarily mortgage interest. For many landlords, this represents the most significant shift in their tax position in decades, affecting not just immediate tax bills but also long-term investment strategies.
How Section 24 Works: The 20% Tax Credit
Before Section 24, you could deduct all your finance costs (including mortgage interest and loan arrangement fees) directly from your rental income before calculating your taxable profit. This meant relief was given at your marginal rate of income tax – whether that was 20%, 40%, or 45%.
Under Section 24 rules, you can no longer deduct these finance costs from your rental income to calculate your taxable profit. Instead, tax relief comes as a basic rate tax credit equivalent to 20% of the lower of these three amounts:
Total finance costs for the tax year - including mortgage interest, interest on loans to furnish or improve the property, fees for obtaining or repaying mortgages/loans, plus any finance costs brought forward from previous years that were unrelieved
Property business profits for the tax year - calculated as rental income less allowable expenses (excluding the finance costs themselves), but after deducting any brought-forward property losses
Adjusted total income for the tax year - your total income subject to income tax from all sources, after deducting the Personal Allowance and reliefs like losses, but excluding savings and dividend income
A Practical Example of the Change
Let's look at how this affects a real landlord's tax position:
Pre-Section 24 calculation:
Rental Income: £20,000
Allowable Expenses (excluding finance): £3,000
Mortgage Interest: £8,000
Taxable Profit = £20,000 - £3,000 - £8,000 = £9,000
A higher-rate (40%) taxpayer would pay £3,600 tax on this (£9,000 x 40%)
Post-Section 24 calculation:
Rental Income: £20,000
Allowable Expenses (excluding finance): £3,000
Taxable Profit (before finance cost relief) = £20,000 - £3,000 = £17,000
This £17,000 gets added to your other income for tax calculation
Then you receive a tax credit of £1,600 (20% of £8,000 mortgage interest, assuming this is the lowest of the three limiting factors)
A higher-rate (40%) taxpayer would pay £5,200 tax on this (£17,000 x 40% - £1,600)
The Critical Consequence You Need to Understand
Section 24 fundamentally changes your tax calculation by increasing your declared taxable income figure, even when your actual cash profit from the property stays exactly the same. This happens because finance costs no longer reduce the profit figure that gets added to your other income – the relief only comes much later as a credit against your final tax bill.
This mechanism of calculating taxable income on a higher base figure creates significant knock-on effects beyond just the income tax you pay directly on rental profits. It can potentially impact thresholds for other taxes, allowances, and benefits, making strategic planning more important than ever.
Impact on Different Taxpayers (Especially Higher-Rate)
The impact of Section 24 varies significantly depending on your overall income level, with higher-rate taxpayers bearing the heaviest burden:
Basic rate (20%) taxpayers: If your total taxable income (including the rental profit calculated before finance cost relief) stays within the basic rate tax band, Section 24 may not dramatically increase your overall tax liability. The 20% credit effectively mirrors the relief you would have received previously. However, there's a crucial catch – the inflated taxable income figure (because finance costs aren't deducted upfront anymore) could push you from basic rate into higher rate territory.
Higher (40%) and additional rate (45%) taxpayers: You're most adversely affected by Section 24. Previously, you received tax relief on finance costs at your marginal rates of 40% or 45%. Under the new rules, this relief is capped at the basic rate of 20% via the tax credit. This represents a substantial reduction in the value of your relief. For every £100 of mortgage interest, you previously saved £40 in tax if you were a higher-rate taxpayer; now you only save £20. That £20 difference per £100 of interest directly erodes your net profit.
This change disproportionately impacts leveraged individual landlords who are higher or additional rate taxpayers. For some, especially those with high mortgage balances relative to rental income, properties that were profitable under the old system could now be making losses after tax. This financial pressure has driven many higher-rate taxpayers to explore alternative ownership structures, such as incorporating their property portfolio into a limited company or transferring beneficial ownership to a spouse or civil partner in a lower tax bracket.
Interaction with Cash Basis Accounting
Many smaller landlords use cash basis accounting for calculating rental profits, where you record income when received and expenses (including finance costs) when paid. It's important to understand that using cash basis doesn't allow you to bypass Section 24 restrictions.
The 20% tax credit mechanism still applies exactly the same way. The key difference is that your "finance costs for the year" figure used in the Section 24 calculation (to determine how much is eligible for the 20% credit) will be based on finance costs actually paid during that tax year, rather than accrued costs. This remains subject to the overriding limits based on property profits and adjusted total income.
While cash basis simplifies the general recognition of income and expenses, it doesn't change the fundamental way Section 24 restricts relief on finance costs for residential properties. The timing of when you actually make mortgage interest payments becomes crucial under cash basis, as this dictates the amount of finance costs that can be factored into your 20% tax credit calculation for that specific tax year. If you're using cash basis, you must maintain accurate records of the dates and amounts of all finance cost payments.