From April 2027, the UK tax system introduces separate property income tax rates that will fundamentally change how Section 24 mortgage interest relief works for landlords. The new 22% basic rate property tax creates a significant mismatch with Section 24's fixed 20% tax credit, potentially increasing costs for many property investors.
Understanding how these 2027 property tax rates section 24 changes interact is crucial for landlords planning their property investment strategy and considering whether incorporation might become more attractive.
What Are the New 2027 Property Tax Rates?
Starting 6 April 2027, property income will be taxed at separate rates rather than using general income tax bands:
- Basic rate: 22% on property income (vs 20% general income tax)
- Higher rate: 42% on property income (vs 40% general income tax)
- Additional rate: 47% on property income (vs 45% general income tax)
Your property income tax band still depends on your total taxable income, including employment, pensions, and other sources. However, once the band is determined, property income faces these higher rates.
For example, a landlord earning £35,000 from employment plus £20,000 rental profit would pay 22% tax on the property income portion, not the 20% general rate that applies to their employment income.
How Section 24 Currently Works
Under the current Section 24 tax relief system, landlords cannot deduct mortgage interest as an expense. Instead, they receive a tax credit equal to 20% of their allowable finance costs.
The Section 24 calculation works as follows:
- Rental income minus allowable expenses (excluding finance costs) = property profit
- Tax calculated on full property profit at marginal rates
- 20% tax credit applied against finance costs
- Net tax liability = gross tax minus tax credit
This system was designed when basic rate taxpayers paid 20% on all income types, creating a neutral position for basic rate landlords.
The 2027 Mismatch: 22% Tax vs 20% Relief
The introduction of separate property income tax rates 2027 creates a fundamental mismatch for basic rate landlords. They will pay 22% tax on property profits but only receive 20% relief on mortgage interest.
Consider this example of a basic rate landlord with £30,000 rental income, £10,000 allowable expenses, and £15,000 mortgage interest:
Current system (2026/27):
- Taxable property profit: £20,000
- Tax at 20%: £4,000
- Section 24 credit (20% × £15,000): £3,000
- Net tax: £1,000
From 2027/28:
- Taxable property profit: £20,000
- Tax at 22%: £4,400
- Section 24 credit (20% × £15,000): £3,000
- Net tax: £1,400
The landlord faces an extra £400 annual tax cost despite no change in their circumstances—purely due to the rate mismatch.
Impact on Different Types of Landlords
Basic Rate Landlords
Basic rate landlords face the most significant impact from 2027 property tax rates section 24 changes. The 2 percentage point increase (from 20% to 22%) on property income, combined with the static 20% Section 24 relief, effectively reduces their mortgage interest relief.
For a landlord with £100,000 in mortgage interest costs, this mismatch creates an additional £2,000 annual tax liability (2% × £100,000).
Higher and Additional Rate Landlords
Higher rate landlords actually benefit slightly from the changes. While their property income tax increases from 40% to 42%, they still receive only 20% relief on mortgage interest—but the gap between their tax rate and relief rate widens from 20 percentage points to 22 percentage points.
This means the effective penalty for higher rate landlords increases marginally, but they were already significantly disadvantaged by Section 24.
Landlords with Mixed Rate Bands
Landlords whose property income spans multiple tax bands face complex calculations. Property income falling in the basic rate band (22%) will be more severely affected than income in higher rate bands.
Will Section 24 Relief Rates Change?
The government has not announced any intention to increase the Section 24 tax credit rate from 20% to align with the new 22% basic rate property tax. This suggests the mismatch is likely intentional—a further erosion of tax relief for property investors.
Historically, Section 24 changes have been implemented to reduce the tax advantages of property investment rather than maintain them. The 2027 rate changes appear consistent with this policy direction.
Planning Strategies Before 2027
Consider Incorporation
The widening gap between individual and corporate tax treatment makes incorporation increasingly attractive. Limited companies can still deduct mortgage interest as an expense and face corporation tax rates of 19% (profits up to £250,000) or 25% (above £250,000).
For basic rate landlords facing 22% property tax from 2027, incorporation could provide immediate tax savings, especially for highly geared properties.
Accelerate Capital Expenditure
Capital expenses that qualify for immediate tax relief become more valuable when property income faces higher tax rates. Consider bringing forward property improvements, equipment purchases, or other qualifying capital expenditure before April 2027.
Review Financing Structures
The reduced value of mortgage interest relief makes alternative financing structures worth considering. This might include using accumulated profits to reduce borrowing or exploring commercial finance options that qualify for different tax treatment.
Long-Term Implications for Property Investment
The 2027 property tax rates section 24 changes represent another step in the government's strategy to reduce tax advantages for individual property investors. Combined with previous changes including Section 24 restrictions, reduced CGT allowances, and increased SDLT surcharges, the cumulative impact is significant.
Basic rate landlords—who historically enjoyed relatively favorable tax treatment—now face effective mortgage interest relief at just 20% against income taxed at 22%. This 2 percentage point disadvantage applies to every pound of mortgage interest, making highly leveraged property investments less attractive.
Professional Advice and Planning
The interaction between separate property tax rates and Section 24 creates complex planning scenarios that require professional input. Property accountants can model different scenarios including incorporation timing, debt restructuring, and investment strategy changes.
Given the significant changes taking effect from April 2027, landlords should begin planning now rather than waiting for implementation. The lead time for incorporation, in particular, means decisions made in 2025/26 will determine tax positions for years to come.
The changing property investment tax landscape requires active management rather than assuming historical tax treatments will continue. Professional guidance helps identify the most tax-efficient structures for individual circumstances.