When you remortgage your buy-to-let property, Section 24 continues to apply to all mortgage interest payments, regardless of whether you're refinancing existing debt or borrowing additional funds. The tax restriction caps your mortgage interest relief at the basic rate of 20%, even if you're a higher or additional rate taxpayer.
This means that section 24 remortgaging decisions can significantly impact your tax position, particularly if you're increasing your borrowing or moving from a lower to higher interest rate. Understanding how the restriction applies to different remortgaging scenarios is crucial for effective tax planning.
How Section 24 Works with Remortgaging
Section 24 treats all mortgage interest on residential buy-to-let properties as a basic rate tax credit, not a deduction from rental income. This applies whether the mortgage is:
- Your original purchase mortgage
- A remortgage with the same lender
- A remortgage with a new lender
- Additional borrowing secured against the property
The restriction applies to the total annual interest paid, regardless of how many times you've remortgaged or restructured your financing during the tax year.
Tax Impact of Increased Borrowing Through Remortgaging
Many landlords use remortgaging to release equity for further property purchases or improvements. Under Section 24, any additional interest from increased borrowing is still restricted to basic rate relief.
Example: A higher rate taxpayer remortgages their BTL property, increasing their mortgage from £200,000 to £300,000 at 5% interest. Their annual interest increases from £10,000 to £15,000. Under Section 24:
- Total interest: £15,000
- Tax credit available: £15,000 × 20% = £3,000
- If they could deduct the full amount, the tax saving would be £15,000 × 40% = £6,000
- Section 24 cost: £6,000 - £3,000 = £3,000 additional tax annually
Refinancing at Higher Interest Rates
When you remortgage BTL section 24 properties at higher interest rates, the tax restriction becomes more punitive for higher rate taxpayers. The gap between the 20% tax credit and your marginal tax rate widens as interest costs increase.
Consider a portfolio landlord with £500,000 of BTL mortgages who remortgages from 3% to 6% interest rates:
- Previous interest: £15,000 annually
- New interest: £30,000 annually
- Section 24 tax credit: £30,000 × 20% = £6,000
- Additional rate taxpayer (45%): loses £30,000 × 25% = £7,500 annually in tax relief
Remortgaging from Interest-Only to Repayment
Section 24 only applies to the interest portion of mortgage payments. If you remortgage from interest-only to repayment, only the interest element receives the basic rate tax credit. The capital repayment portion receives no tax relief.
This can make interest-only mortgages more attractive from a tax perspective, though you must consider the overall financial implications including eventual capital repayment requirements.
Cash-Out Refinancing and Section 24
When you remortgage to release equity (cash-out refinancing), the tax treatment depends on how you use the additional funds:
Property Business Use
Interest on funds used for property business purposes typically qualifies for Section 24 tax credit relief:
- Purchasing additional rental properties
- Improving existing rental properties
- Covering property business expenses
Non-Property Business Use
Interest on funds used for non-property purposes may not qualify for any tax relief:
- Personal expenses
- Non-property investments
- Other business activities
HMRC requires you to apportion interest between qualifying and non-qualifying purposes, which can create complex calculations and record-keeping requirements.
Impact on Cash Flow After Remortgaging
The increased mortgage section 24 impact on cash flow can be significant when remortgaging at higher rates or with increased borrowing. Unlike the pre-Section 24 era, higher mortgage interest doesn't provide proportional tax relief for higher rate taxpayers.
Cash flow calculation example: Higher rate taxpayer with £25,000 annual rental income and £20,000 mortgage interest after remortgaging:
- Taxable rental income: £25,000 (full amount)
- Income tax: £25,000 × 40% = £10,000
- Section 24 tax credit: £20,000 × 20% = £4,000
- Net income tax: £10,000 - £4,000 = £6,000
- After-tax income: £25,000 - £6,000 - £20,000 = -£1,000 (cash flow negative)
Planning Considerations Before Remortgaging
Before proceeding with a BTL remortgage, consider these tax planning aspects:
Incorporation Assessment
Section 24 doesn't apply to companies. If remortgaging makes your portfolio cash flow negative, incorporating your property business might provide better tax efficiency, as companies can deduct mortgage interest in full.
Portfolio Restructuring
Consider whether selling some properties before remortgaging might be more tax-efficient than maintaining a highly leveraged portfolio under Section 24.
Interest Rate Sensitivity
Model different interest rate scenarios to understand how rising rates will impact your after-tax cash flow, particularly given that Section 24 makes you less resilient to rate increases.
Record Keeping for Remortgaged Properties
Maintain detailed records of all remortgaging activities:
- Original mortgage amounts and terms
- New mortgage amounts and interest rates
- Purpose of any additional borrowing
- Legal and arrangement fees (may be deductible)
- Interest payments throughout the tax year
This documentation is essential for accurate tax calculations and potential HMRC enquiries.
Future Changes to Consider
From April 2027, property income will be subject to separate tax rates (22% basic, 42% higher, 47% additional rate). While Section 24 will still apply, the interaction between the restriction and these new rates may affect remortgaging decisions.
The Section 24 restriction is likely to remain in place, making it important to factor these rules into any long-term financing strategies.
Professional Advice on Remortgaging Decisions
Given the complexity of Section 24 interactions with different remortgaging scenarios, consider consulting both a mortgage adviser familiar with BTL lending and a specialist property accountant who can model the tax implications of your specific situation.
This dual approach ensures you understand both the financing options available and their tax consequences, helping you make informed decisions about your property portfolio's financial structure.