What Is Section 24? The Full Explanation
Section 24 of the Finance Act 2015, also called the "tenant tax" or "landlord tax," fundamentally changed the way individual residential landlords in England, Scotland, and Wales are taxed on their mortgage costs. It was introduced by Chancellor George Osborne and has been fully in effect since the 2020/21 tax year after a four-year phase-in period.
Before Section 24, landlords were treated similarly to business owners: mortgage interest was a deductible expense, reducing taxable profit in the same way that rent, insurance, and maintenance costs reduce it. This made intuitive sense because the mortgage interest is a real cost of running the letting business.
Under Section 24, individual landlords (not companies) can no longer deduct finance costs — primarily mortgage interest — when calculating their taxable rental profit. Instead, they receive a tax credit equal to 20% of the mortgage interest paid during the year. This tax credit is deducted from the final tax bill, not from the taxable income.
The Core Mechanism in Simple Terms
Old system: Taxable profit = Rental income − Mortgage interest − Other expenses
Section 24: Taxable income = Rental income − Other expenses (only) → Tax credit of 20% of mortgage interest applied at the end
The Phase-In Timeline (2017–2020)
Section 24 was introduced gradually to give landlords time to adapt:
| Tax Year | Deductible Interest | 20% Tax Credit Applies To |
|---|---|---|
| 2017/18 | 75% | 25% of mortgage interest |
| 2018/19 | 50% | 50% of mortgage interest |
| 2019/20 | 25% | 75% of mortgage interest |
| 2020/21 onwards | 0% | 100% of mortgage interest |
From 2020/21, no mortgage interest can be deducted from rental income. 100% of mortgage interest is eligible for the 20% basic rate tax credit instead.
Detailed Worked Example: Section 24 Impact on a Higher Rate Taxpayer
This is the example that illustrates why Section 24 is so damaging for higher rate taxpayers:
Pre-2020 System
Rental income: £20,000
Minus mortgage interest: −£15,000
Minus other expenses: −£2,000
Taxable profit: £3,000
Income tax at 40%: £1,200
After-tax profit: £1,800
Section 24 (Current)
Rental income: £20,000
Minus other expenses only: −£2,000
Taxable income: £18,000
Income tax at 40%: £7,200
Less 20% credit on £15,000: −£3,000
Net tax payable: £4,200
After-tax profit: −£1,200
Who Section 24 Does and Does NOT Affect
Significantly Affected
- Higher rate (40%) individual landlords with BTL mortgages
- Additional rate (45%) individual landlords
- Basic rate taxpayers pushed into higher rate by the inflated taxable profit
- Landlords with high loan-to-value mortgages
- Landlords with multiple mortgaged properties
- Portfolio landlords with significant interest costs
Unaffected or Minimally Affected
- Landlords with no mortgage (cash buyers)
- Basic rate (20%) taxpayers whose rate does not change
- Properties held in a limited company
- Furnished Holiday Letting landlords (currently)
- Commercial property landlords
- Landlords who own properties through REITs
Section 24 Mitigation Strategies
1. Incorporate into a Limited Company
The most powerful — and increasingly popular — mitigation is to purchase buy-to-let properties through a limited company (Special Purpose Vehicle or SPV). Companies are not subject to Section 24 and can deduct mortgage interest in full. They pay Corporation Tax at 19-25% on profits (depending on profit level), and you extract profits via dividends (taxed at lower rates than income) or salary.
Key considerations: Transferring existing personally-owned properties to a company triggers SDLT on market value and potentially CGT — making incorporation expensive for existing portfolios. New purchases via a company are straightforward. BTL mortgage rates are typically 0.5-1.0% higher for companies, and you will need a specialist accountant (£1,000-£2,500/year). Overall, incorporation is highly beneficial for higher rate taxpayers building new portfolios but expensive to execute on existing personal portfolios.
2. Transfer to a Lower-Earning Spouse or Partner
If your spouse or civil partner is a basic rate taxpayer (income under £50,270), transferring beneficial ownership of rental properties to them (or holding them jointly) means rental income is taxed at 20% with the 20% Section 24 credit perfectly offsetting any change. Transfers between spouses are CGT-free. This works particularly well where one partner has little or no employment income.
3. Increase Pension Contributions
Making pension contributions reduces your Adjusted Net Income, which determines your tax band. If Section 24 is pushing you into the 40% band, sufficient pension contributions may bring you back to basic rate, eliminating the Section 24 penalty. The pension contribution also receives full tax relief at your marginal rate, making it doubly effective.
4. Reduce Mortgage Balance / Refinance
The impact of Section 24 scales directly with the amount of mortgage interest you pay. Reducing the mortgage balance (overpaying) or remortgaging to a lower rate reduces the interest charge and therefore the Section 24 impact. For portfolio landlords, selling a high-mortgage property and paying down debt on others can significantly reduce the aggregate tax impact.
5. Sell Underperforming Properties
Properties with high mortgages and low yields may have become tax-inefficient under Section 24 to the point where they represent a net loss after tax. In some cases, selling and redeploying capital elsewhere (cash purchases, ISAs, pensions) produces a better net return than continuing to hold a highly leveraged property with tax costs exceeding economic profits.
Limited Company Pros and Cons for Buy-to-Let
| Factor | Pros | Cons |
|---|---|---|
| Mortgage Interest | Fully deductible against profits | Rates 0.5-1% higher than personal BTL |
| Tax Rate | Corporation Tax 19-25% vs income tax 40-45% | Dividend tax when extracting profits |
| Existing Properties | Can shelter new purchases from Section 24 | Transfer triggers SDLT + CGT on existing properties |
| Administration | Cleaner separation of personal and business finances | Annual accounts, CT600, higher accountancy costs |
| Estate Planning | Shares easier to gift than property; no SDLT on share transfer | Complex to unwind; lender consent needed for mortgages |
| Mortgage Access | Growing lender market (100+ BTL lenders now accept SPVs) | Stricter criteria, personal guarantee usually required |
Frequently Asked Questions
What is Section 24 of the Finance Act 2015?
Section 24 restricts the tax relief that individual landlords can claim on residential property finance costs (mainly mortgage interest). Before 2017, landlords deducted full mortgage interest from rental income to calculate taxable profit. From 2020/21, they receive only a 20% basic rate tax credit on mortgage interest instead.
Who is most affected by Section 24?
Higher rate (40%) and additional rate (45%) taxpayers who own buy-to-let properties personally with significant mortgage debt. For basic rate (20%) taxpayers, the 20% tax credit exactly replaces the previous deduction — no net change. Landlords with no mortgage are entirely unaffected.
Can I avoid Section 24 using a limited company?
Yes — Section 24 only applies to individual landlords. Properties in a limited company are not subject to the restriction and can still deduct full mortgage interest as a business expense. However, transferring existing personal properties to a company triggers SDLT and CGT. New purchases via a company are straightforward but BTL mortgage rates are typically 0.5-1% higher.
Does Section 24 apply to furnished holiday lettings?
Section 24 does not currently apply to qualifying Furnished Holiday Lettings (FHLs). However, from April 2025 the government has announced plans to abolish the FHL tax regime, which would bring FHL properties in line with standard BTL and subject them to Section 24. FHL landlords should seek specialist advice urgently.
Can Section 24 make me pay tax on a loss-making property?
Yes — if your mortgage interest exceeds your actual rental profit, you can still owe income tax under Section 24. Example: £15,000 income, £16,000 mortgage interest, £2,000 other costs. Economic loss = £3,000. But Section 24 taxable income = £13,000. At 40% tax minus 20% credit on £16,000 (£3,200) = net tax of £2,000 owed on a property that lost money. This affects many highly-leveraged landlords in London and the South East.
How does Section 24 affect my Self Assessment return?
On the UK Property pages of your Self Assessment return, you report full rental income and deduct only non-finance expenses (agent fees, insurance, maintenance). The resulting taxable profit is added to other income. Then in the reliefs section you calculate 20% of the mortgage interest paid and claim this as a tax credit. The inflated taxable income can affect personal allowance withdrawal (£100k+), child benefit charge, pension annual allowance, and student loan repayments.
What are the best strategies to mitigate Section 24?
Top mitigation strategies: (1) Incorporate new purchases into a limited company; (2) Transfer property to a basic-rate-tax-paying spouse; (3) Make pension contributions to reduce adjusted net income below higher rate threshold; (4) Remortgage to a lower rate to reduce interest costs; (5) Overpay mortgage to reduce outstanding balance; (6) Sell highly leveraged properties with poor after-tax returns and reinvest elsewhere. Professional tax advice is essential for portfolio landlords.
Sources & References
- Finance Act 2015, Section 24 — UK Legislation
- HMRC — Income Tax on rental income: allowable expenses
- HMRC — Restricting finance cost relief for individual landlords
- HMRC Self Assessment Helpsheet HS340: Interest and alternative finance payments eligible for relief
Disclaimer: This guide provides general information only and does not constitute tax advice. Tax rules are complex and individual circumstances vary. Always consult a qualified accountant or tax adviser before making decisions about your property portfolio structure.