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.
Qualifying Finance Costs Under Section 24
Section 24 applies to finance costs for residential property lettings. The primary cost is mortgage interest, but several other borrowing costs also qualify for the restricted 20% tax credit.
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
Both variable rate and fixed rate mortgage interest are treated identically — subject to the 20% tax credit restriction. However, capital repayments on mortgages have never been tax deductible and remain non-deductible under Section 24. Only the interest portion qualifies.
Loan Arrangement and Professional Fees
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
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.
Other Borrowing Costs
Other forms of borrowing interest can qualify if used for the property business.
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. Common scenarios include covering short-term cash flow gaps or funding maintenance.
Credit card interest and personal loan interest can also 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 and maintaining detailed records.
Development finance costs face complex Section 24 considerations. Interest on loans for property development may be treated as trading expenses, finance costs under Section 24, or capital costs, depending on your development intentions. Short-term bridging loans for property purchases usually qualify under Section 24, regardless of the loan term.
What Section 24 Does NOT Apply To
It is crucial to understand which costs and structures fall outside the Section 24 restrictions.
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.
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.
Finance Costs in Limited Company Structures
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 (at 19% for small profits or 25% main rate), dividend tax on profit extraction, capital gains implications on property transfers, and stamp duty on property transfers to company. Professional advice is essential before making incorporation decisions based solely on Section 24 avoidance.
Record Keeping, Compliance and Common Mistakes
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 fee payments, overdraft and credit card statements for business expenditure, and loan agreements. Consider using property accounting software that categorises finance costs correctly, which becomes mandatory for many under Making Tax Digital from April 2026.
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. 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, and ensuring compliance systems are ready for Making Tax Digital. Given the complexity, professional advice becomes increasingly valuable for property investors with significant finance costs.