Section 24 has fundamentally changed how individual landlords can claim tax relief on mortgage interest. Introduced in April 2017 and fully implemented by April 2020, this legislation restricts mortgage interest relief to the basic rate of tax (20%) only.

For higher rate taxpayers, this represents a significant increase in their tax burden. Understanding how Section 24 works is crucial for any landlord with mortgage debt on their rental properties.

What is Section 24 Mortgage Interest Restriction?

Section 24 mortgage interest restriction limits the tax relief available on mortgage interest and other finance costs for residential rental properties owned by individuals. Previously, landlords could deduct full mortgage interest as an expense before calculating taxable profit.

Now, mortgage interest is treated as a tax credit rather than a deductible expense. This means you can only reduce your tax bill by 20% of your mortgage interest, regardless of your marginal tax rate.

The restriction applies to residential rental properties owned personally. It does not apply to commercial properties or properties owned through limited companies.

How Section 24 Works in Practice

Under the old system, a higher rate taxpayer could effectively claim 40% relief on mortgage interest. Under Section 24, everyone is limited to 20% relief.

Here's a practical example: A landlord has rental income of £30,000 and mortgage interest of £15,000. Their other allowable expenses total £5,000.

Before Section 24:

  • Rental income: £30,000
  • Less: Mortgage interest: £15,000
  • Less: Other expenses: £5,000
  • Taxable profit: £10,000

After Section 24:

  • Rental income: £30,000
  • Less: Other expenses: £5,000
  • Taxable profit: £25,000
  • Tax credit: £15,000 × 20% = £3,000

The landlord now pays tax on £25,000 instead of £10,000, but gets a £3,000 tax credit. For a higher rate taxpayer, this significantly increases their tax bill.

Who is Affected by Section 24?

Section 24 mortgage interest restriction affects individual landlords who own residential rental properties with mortgages. You're impacted if you:

  • Own buy-to-let properties in your personal name
  • Have mortgages or loans secured against these properties
  • Pay higher rate tax (currently 40% or 45%)
  • Are pushed into higher rate tax by the restriction itself

The restriction is particularly painful for landlords who are pushed from basic rate to higher rate tax. This happens because mortgage interest can no longer be deducted before calculating your tax band.

Calculating Your Section 24 Impact

To understand your Section 24 impact, you need to calculate your tax under both the old and new systems. The difference shows your additional tax burden.

Consider a landlord with total income of £55,000 (including £35,000 rental income), mortgage interest of £20,000, and other property expenses of £8,000.

Old System Tax Calculation:

  • Total income: £55,000
  • Less: Personal allowance: £12,570
  • Less: Mortgage interest: £20,000
  • Less: Other expenses: £8,000
  • Taxable income: £14,430
  • Tax due: £1,443 (all at 20%)

Section 24 Tax Calculation:

  • Total income: £55,000
  • Less: Personal allowance: £12,570
  • Less: Other expenses: £8,000
  • Taxable income: £34,430
  • Tax due: £6,886 (£2,143 at 20% + £4,743 at 40%)
  • Less: Tax credit: £4,000 (£20,000 × 20%)
  • Net tax due: £2,886

The additional tax burden is £1,443 per year – a 100% increase. For help with these calculations, you might find our tax calculators useful.

Solutions to Section 24

Several strategies can help mitigate Section 24's impact, though each comes with its own considerations and costs.

Limited Company Incorporation

The most common solution is transferring properties to a limited company. Companies are not subject to Section 24 and can still deduct full mortgage interest as an expense.

However, incorporation involves significant costs and considerations:

  • Capital gains tax on transfer (though incorporation relief may apply)
  • Stamp duty land tax at commercial rates
  • Corporation tax on company profits
  • Personal tax when extracting funds from the company

Our incorporation service can help you understand whether this strategy makes sense for your portfolio.

Pension Contributions

Increasing pension contributions can help reduce your marginal tax rate. The annual allowance for 2024/25 is £60,000, though this may be reduced for high earners.

Regular pension contributions can keep you in the basic rate band, ensuring Section 24 has minimal impact.

Spouse/Partner Transfer

If your spouse or partner has a lower marginal tax rate, transferring properties or shares in properties might reduce the overall tax burden. This can be particularly effective if one partner is a basic rate taxpayer.

Long-term Property Strategy

Section 24 has changed the fundamentals of property investment for individual landlords. Many investors are now considering whether the traditional buy-to-let model remains viable.

Key considerations for your long-term strategy include:

  • Future mortgage interest rates and their impact
  • Your overall income and tax position
  • The costs and benefits of incorporation
  • Alternative investment structures

The restriction has made property investment through companies increasingly attractive, particularly for higher rate taxpayers with significant mortgage debt.

Getting Professional Advice

Section 24 mortgage interest restriction affects every landlord differently. Your optimal strategy depends on your income, property portfolio, mortgage debt, and personal circumstances.

Given the complexity and potential tax savings involved, specialist advice is often worthwhile. The costs of restructuring may be significant, but the long-term tax savings can be substantial.

Our team specialises in helping landlords navigate Section 24 and implement effective solutions. We can model different scenarios and help you understand the true costs and benefits of each option.