Understanding what counts as finance costs under Section 24 is essential for every UK landlord. Section 24 restricts how you can claim tax relief on borrowing costs for residential buy-to-let properties, limiting relief to a basic rate tax credit instead of full deduction against rental income.
This guide explains exactly which finance costs qualify under Section 24, how the restrictions apply, and what this means for your tax calculation. Getting this wrong can lead to overpaying or underpaying tax — both problematic with HMRC.
What is Section 24 and How Does it Affect Finance Costs?
Section 24 of the Finance Act 2017 fundamentally changed how landlords claim tax relief on borrowing costs. Previously, mortgage interest and other finance costs were fully deductible against rental income before calculating tax.
From April 2020, finance costs on residential buy-to-let properties are restricted to a basic rate tax credit of 20%. This applies regardless of your marginal tax rate — higher and additional rate taxpayers effectively lose significant tax relief.
For example, a higher rate taxpayer previously claiming £10,000 mortgage interest would have saved £4,000 in tax (40% relief). Under Section 24, they now get a £2,000 tax credit (20% relief), losing £2,000 annually.
The restrictions don't change which costs qualify — they change how relief is given. Understanding the qualifying costs remains crucial for accurate tax calculations and Making Tax Digital compliance.
Mortgage Interest and Capital Repayments
Mortgage interest is the primary finance cost affected by Section 24. This includes interest on:
- Buy-to-let mortgages for property purchases
- Remortgages and refinancing arrangements
- Additional borrowing secured on rental properties
- Bridging loans for property transactions
However, capital repayments on mortgages have never been tax deductible and remain non-deductible under Section 24. Only the interest portion of mortgage payments qualifies for the restricted relief.
Many landlords receive annual mortgage statements showing the split between interest and capital payments. Keep these statements as they're essential for accurate tax calculations and potential HMRC enquiries.
Variable and Fixed Rate Mortgages
The type of mortgage doesn't affect whether interest qualifies under Section 24. Both variable rate and fixed rate mortgage interest are treated identically — subject to the 20% tax credit restriction.
Interest-only mortgages may seem advantageous under Section 24 since all payments are interest (and therefore qualify for relief). However, the restriction means higher rate taxpayers still face increased tax costs compared to the pre-2020 position.
Loan Arrangement Fees and Section 24
Loan arrangement fees Section 24 treatment follows established tax principles. These costs typically qualify for tax relief but are subject to the Section 24 restrictions for residential property loans.
Qualifying loan arrangement fees include:
- Mortgage broker fees and commissions
- Lender arrangement fees and booking fees
- Valuation fees required by the lender
- Legal fees for mortgage arrangements
- Higher lending charge premiums
However, the timing of relief depends on the fee structure. One-off arrangement fees are typically spread over the loan term or claimed when paid, depending on your accounting method. Annual fees can usually be claimed in the year paid.
Some costs that appear to be arrangement fees don't qualify. Property purchase legal fees, surveys for your benefit (rather than lender requirements), and general property acquisition costs remain capital expenses not affected by Section 24.
Overdraft Interest for Landlords
Overdraft interest landlord claims under Section 24 depend on the business purpose of the borrowing. Overdraft interest on business accounts used exclusively for property rental activities typically qualifies for the restricted relief.
Common qualifying overdraft scenarios include:
- Short-term cash flow gaps between rent collection and mortgage payments
- Funding property maintenance and repair costs
- Covering property management expenses
- Bridging finance for property transactions
The key test is business purpose. Personal overdraft interest, even if you later use funds for property activities, doesn't qualify. Maintaining separate business accounts helps demonstrate the business purpose of borrowing.
Keep detailed records of overdraft usage, especially if accounts are used for mixed personal and business purposes. HMRC may challenge claims without clear business justification.
Credit Card Interest and Personal Loans
Credit card interest and personal loan interest can qualify under Section 24 if used wholly for property business purposes. However, proving business use can be challenging, particularly with personal credit facilities.
Best practice involves:
- Using business credit cards for property-related expenses
- Maintaining detailed records of expenditure
- Avoiding mixed personal/business use on the same facility
- Keeping receipts and invoices supporting business use
Personal loans used to purchase rental properties or fund substantial improvements typically qualify, but ensure you can demonstrate the business purpose clearly.
Development Finance and Short-Term Lending
Development finance costs face complex Section 24 considerations. Interest on loans for property development may be treated as:
- Trading expenses (if developing properties for sale)
- Finance costs under Section 24 (if creating rental properties)
- Capital costs (if enhancing property value)
The treatment depends on your development intentions and the specific circumstances. Development finance for properties intended for immediate sale typically falls outside Section 24 as trading income rather than property income.
Short-term bridging loans for property purchases usually qualify under Section 24, regardless of the loan term. The residential property restriction applies to the loan purpose, not duration.
Commercial Property Finance Costs
Section 24 restrictions do not apply to commercial property finance costs. Interest on loans for offices, shops, warehouses, and other commercial properties remains fully deductible against rental income.
This creates a significant tax advantage for commercial property investment compared to residential buy-to-let. Commercial property landlords continue to benefit from full mortgage interest relief at their marginal tax rate.
Mixed-use properties (part residential, part commercial) require apportionment. Only the residential portion of finance costs faces Section 24 restrictions. Accurate apportionment based on floor area or rental income proportions is essential.
Company Structures and Section 24
Finance costs in limited company structures are not affected by Section 24. Companies can continue to claim full corporation tax relief on mortgage interest and other finance costs for both residential and commercial properties.
This has driven many landlords to consider incorporation to avoid Section 24 restrictions. However, incorporation involves other tax considerations including:
- Corporation tax on rental profits
- Dividend tax on profit extraction
- Capital gains implications on property transfers
- Stamp duty on property transfers to company
The overall tax position depends on individual circumstances, rental income levels, and profit extraction requirements. Professional advice is essential before making incorporation decisions based solely on Section 24 avoidance.
Record Keeping and Documentation
Accurate record keeping becomes more critical under Section 24, particularly with Making Tax Digital requirements from April 2026.
Essential documentation includes:
- Annual mortgage statements showing interest/capital splits
- Bank statements evidencing loan arrangement fee payments
- Overdraft statements and business purpose documentation
- Credit card statements for business expenditure
- Loan agreements and facility letters
Many landlords underestimate the documentation required to support finance cost claims. HMRC enquiries often focus on the business purpose and calculation of relief claims.
Consider using property accounting software that categorises finance costs correctly and maintains audit trails for all claims. This becomes mandatory for many landlords under Making Tax Digital from April 2026.
Common Mistakes with Finance Costs Under Section 24
Several common errors can lead to incorrect tax calculations or HMRC challenges:
- Including capital repayments in finance cost calculations
- Claiming personal borrowing costs without clear business purpose
- Incorrectly apportioning mixed-use property finance costs
- Missing arrangement fees that qualify for relief
- Applying Section 24 to commercial property finance costs
The most significant error is claiming relief at marginal tax rates rather than applying the 20% tax credit restriction. This can lead to underpayment of tax and potential penalties.
Conversely, some landlords over-restrict their claims by applying Section 24 to costs that don't qualify, such as property management fees or maintenance costs. These remain fully deductible as allowable expenses.
Future Changes and Planning Considerations
From April 2027, separate property income tax rates will apply — 22% basic rate, 42% higher rate, and 47% additional rate specifically for property income. This won't change Section 24 finance cost restrictions but may affect overall tax calculations.
The restriction remains at 20% regardless of the new property income tax rates, potentially creating an even greater disparity between the tax credit received and the tax rate applied to property profits.
Planning considerations include:
- Reviewing property portfolio financing structures
- Considering incorporation before the 2027 rate changes
- Optimising financing arrangements within current rules
- Ensuring compliance systems are ready for Making Tax Digital
Given the complexity of interactions between Section 24, the new property tax rates, and individual circumstances, professional advice becomes increasingly valuable for property investors with significant finance costs.