Finance Costs Under Section 24: What Counts and What You Can Claim

Section 24 confuses a lot of landlords because of one persistent myth: that it stops you claiming your mortgage interest. It does not. Every penny of qualifying residential finance cost still attracts relief. What changed in 2017, and what fully bit from April 2020, is the mechanism: instead of deducting finance costs from your rental profit, you now receive a basic-rate tax reducer worth 20% of those costs for 2026/27. The numbers below show why that distinction can move a higher-rate landlord into a much larger tax bill even when the rent and the mortgage have not changed at all.

This guide sets out precisely which costs count as residential finance costs, which fall outside the restriction, how the three-part cap actually works, where the figures belong on your self-assessment return, and a full worked example. It is written for individual landlords; companies are dealt with separately below because the restriction does not touch them.

What is Section 24 and how does the restriction work?

Section 24 of the Finance (No. 2) Act 2015 inserted the finance cost restriction into the tax code. The mechanics now live in two places worth knowing if you ever need to check the law: ITTOIA 2005 s.272A removes the deduction, and ITTOIA 2005 s.274A to s.274C give the replacement tax reducer.

The rule phased in over four years. For completeness: 2017/18 allowed 75% of finance costs as a deduction with 25% as a credit, 2018/19 was 50/50, 2019/20 was 25/75, and from 2020/21 onwards the deduction disappeared entirely. So for 2026/27 the position is simple: none of your residential finance costs are deducted from profit, and all of them feed the 20% basic-rate reducer instead.

Why does that matter so much for higher earners? Because your taxable rental profit is now calculated before any finance cost relief, and that profit is taxed at your marginal rate. A higher-rate landlord is therefore taxed at 40% on rent that, in real cash terms, went straight to the lender as interest, and only gets 20% of that interest back as a credit. The 20-point gap between the rate you pay and the rate you reclaim is the whole of Section 24 in one sentence.

The restriction is targeted, not universal. It applies to dwelling-related loans for residential property let by individuals (and by partners and trustees in the equivalent way). It does not apply to companies, to commercial property, or to the genuinely commercial finance costs of a non-dwelling business.

Which residential finance costs qualify?

HMRC's working scope sits in its Property Income Manual at PIM2054. A cost is a "dwelling-related loan" finance cost if it is a cost of getting or keeping the finance used in the residential letting business. In practice that covers more than just the headline interest figure.

Mortgage and loan interest

The core item. Interest qualifies on:

• buy-to-let mortgages used to purchase let residential property
• remortgages and further advances secured on let residential property, up to the value of the property when first let into the business
• loans used to fund improvements or to buy out a co-owner
• bridging finance used to acquire residential property

Fixed-rate and variable-rate interest are treated identically. There is no distinction by lender type, so interest on a loan from a private individual qualifies in the same way as bank interest, provided the loan is genuinely for the property business and the interest is at a commercial rate.

Arrangement fees and incidental loan costs

The "incidental costs of obtaining loan finance" are finance costs too, under ITTOIA 2005 s.272B. These include lender arrangement and booking fees, mortgage broker fees, a valuation fee where the lender requires it as a condition of the loan, and the legal costs of putting the charge in place. They all attract the 20% credit rather than a full deduction.

Timing depends on your accounting basis. On the cash basis (the default for most landlords below the gross-receipts threshold) you relieve the fee when you pay it. On the accruals basis a substantial one-off arrangement fee is normally spread over the term of the loan, matching the cost to the period it relates to.

Overdraft, credit and refinancing interest

Interest on an overdraft, business credit card or other facility can qualify where the borrowing is for the property business, for instance covering a void period or funding repairs before the rent catches up. The same goes for the cost of refinancing an existing buy-to-let loan: the interest on the new loan continues to qualify, and the fees of arranging it are incidental loan costs. The practical test HMRC applies is purpose and traceability, so a clean business account and contemporaneous records make the difference between a claim that stands and one that is disallowed.

What Section 24 does NOT apply to

Just as many landlords over-claim by mishandling the credit, others over-restrict by applying Section 24 to costs that are nothing to do with it. The restriction is narrow. The table below separates what is in and out of scope.

Cost	Inside Section 24 (20% credit)	Outside Section 24 (full deduction)
BTL mortgage interest (residential, individual)	Yes
Loan arrangement and broker fees (residential)	Yes
Commercial property loan interest		Yes, deducted in full
Mortgage interest held in a limited company		Yes, deducted in full (corporation tax)
Capital repayment of the mortgage		Never deductible (capital, not a cost)
Letting agent fees, repairs, insurance, council tax		Yes, ordinary allowable expenses
Legal and professional costs of selling		Deducted against the capital gain (CGT), not rent

Commercial and mixed-use property

Finance costs on commercial property (offices, shops, warehouses) sit entirely outside Section 24 and remain fully deductible against the rental profit. For a mixed-use building you apportion the finance costs on a just and reasonable basis, typically by floor area or rental value, and only the residential portion is restricted. Getting that split documented matters, because HMRC can revisit an apportionment that looks designed to maximise the unrestricted slice.

Limited companies

A company pays corporation tax, not income tax, so the income tax reducer in s.274A simply does not apply to it. Mortgage interest is a normal deductible expense against company profits. That is the single biggest reason landlords look at holding property through a limited company. It is rarely a clean win, though: corporation tax is due on the profit, extracting the cash triggers further tax, and transferring existing properties into a company can crystallise CGT and SDLT. Section 24 should be one input into an incorporation decision, never the whole case.

The three-part cap and carry-forward

The reducer is not simply 20% of your finance costs in every case. It is 20% of the lowest of three amounts, which protects HMRC against landlords using finance costs to create a negative tax position:

The reducer is 20% of the lowest of:	What it represents
Finance costs for the year (plus any brought forward)	The actual interest and loan costs you incurred
Property profits for the year	Stops the credit exceeding the profit it relates to
Adjusted total income above the personal allowance	Stops the credit wasting income already covered by the allowance

Where the finance costs are not the lowest figure, the unrelieved excess is carried forward to set against future years' property profits under the same rules. Nothing is lost permanently; it is deferred. This matters most in a loss-making or break-even year, where the property-profits cap can defer a chunk of relief into a stronger year.

Worked example: a higher-rate landlord in 2026/27

Take a higher-rate taxpayer with a single let flat. Rent is £18,000 a year. Mortgage interest is £9,000. Other allowable expenses (agent fees, insurance, repairs, safety certificates) come to £3,000.

Step 1: rental profit, finance costs ignored. Rent £18,000 less other expenses £3,000 = £15,000 taxable rental profit. Note the £9,000 interest is not deducted here.

Step 2: income tax on the profit at the marginal rate. At 40% the tax on £15,000 is £6,000.

Step 3: the Section 24 reducer. The lowest of the three capped amounts is the finance costs themselves (£9,000), since profit (£15,000) and adjusted income are both higher. The reducer is 20% of £9,000 = £1,800.

Step 4: tax actually due. £6,000 less the £1,800 reducer = £4,200.

Under the old rules this landlord would have deducted the £9,000 interest first (£18,000 less £3,000 less £9,000 = £6,000 profit), paying 40% on £6,000 = £2,400. Same rent, same mortgage, £1,800 more tax. That difference, and not any change to the cash position, is exactly what Section 24 does to a geared higher-rate landlord. A basic-rate landlord on the same numbers is unaffected, because 20% relief matches their 20% rate, which is the asymmetry the rule was designed to create.

Where the figures go on your tax return

One of the most common GSC questions on this topic is simply where the numbers go. On the paper SA105 UK property pages:

• Box 44 — residential property finance costs for the year (your qualifying interest and loan costs)
• Box 45 — unused residential finance costs brought forward from an earlier year

HMRC works out the 20% reducer automatically from those entries, so you do not calculate the credit yourself on the paper return. If you file online, the property section captures the same two figures. The mistake to avoid is putting finance costs in the general expenses boxes, which would wrongly deduct them in full and create an error HMRC's checks will eventually pick up. If you forgot to enter finance costs on a recent return, you can amend it up to 12 months after the filing deadline and recover the relief.

From 6 April 2026, Making Tax Digital for Income Tax is live for landlords with qualifying income over £50,000, with the threshold dropping to £30,000 from April 2027 and £20,000 from April 2028. Your software will need to categorise finance costs separately from ordinary expenses so the reducer flows through correctly, which makes clean coding of mortgage statements more important than it was on an annual paper return.

The April 2027 rate change and the reducer

This is where most older guidance has gone stale, so it is worth stating precisely. From 6 April 2027, property income in England, Wales and Northern Ireland is taxed at separate rates of 22% basic, 42% higher and 47% additional, enacted by Finance Act 2026 (Royal Assent 18 March 2026). Only Scotland is carved out, because Scottish taxpayers pay Holyrood-set rates on property income.

Critically, the same Finance Act gives the Section 24 reducer at the new 22% property basic rate for 2027/28 onwards, not the old 20%. Because the reducer rate tracks the basic rate of property income, a basic-rate landlord sees no new gap open up: their reducer (22%) matches the rate on their property income (22%). A higher or additional-rate landlord's relief rises from 20% to 22%, a two-point improvement, though it still sits well below their 42% or 47% marginal rate, so the finance-cost wedge for higher earners stays much as it is now rather than widening. For the full picture on the new structure, see our guide to the 2027 property income tax rates and how they sit alongside Section 24 relief for landlords.

Common mistakes that trigger HMRC adjustments

• Deducting interest in full. The single most expensive error: entering finance costs as a normal expense rather than in box 44. It understates profit and the relief is wrong.
• Including capital repayments. Only the interest element of a repayment mortgage is a finance cost. Split the statement.
• Over-restricting genuine expenses. Letting agent fees, repairs, insurance and council tax are ordinary allowable expenses with full relief, not finance costs. See our full list of landlord tax deductions.
• Applying Section 24 to commercial property. Commercial loan interest is fully deductible; do not put it in box 44.
• Forgetting the carry-forward. In a low-profit year, unrelieved finance costs are not lost. Carry them forward in box 45.

Section 24 is a mechanism, not a penalty, and once you separate the qualifying finance costs from the ordinary expenses and apply the credit correctly, the calculation is mechanical. The cost of getting it wrong is real, though, both in overpaid tax and in HMRC enquiries, which is why portfolios with significant gearing tend to be where specialist review pays for itself. If your finance costs are large relative to your profit, or you are weighing incorporation against staying personal, that is the point to take advice rather than rely on default software treatment.