Section 24: How Mortgage Interest Relief Changes Affect Landlords

What is Section 24?

Section 24 of the Finance (No. 2) Act 2015 restricts tax relief on residential property finance costs for individual landlords. Instead of deducting mortgage interest from rental income, you now receive a basic rate (20%) tax credit.

The change was introduced by then-Chancellor George Osborne and was phased in over four years:

• 2017/18: 75% of interest deductible, 25% as tax credit
• 2018/19: 50% deductible, 50% as tax credit
• 2019/20: 25% deductible, 75% as tax credit
• 2020/21 onwards: 0% deductible, 100% as tax credit

How did mortgage interest relief work before?

Before Section 24, landlords could deduct mortgage interest as a business expense before calculating taxable profit. This meant higher-rate taxpayers received 40% or 45% tax relief on their mortgage costs.

For example, if you had:

• Rental income: £20,000
• Mortgage interest: £12,000
• Other expenses: £3,000

Your taxable profit was £5,000. If you were a 40% taxpayer, you paid £2,000 in tax.

How does the 20% tax credit work now?

Now, mortgage interest is NOT deducted from your rental income. You pay tax on the higher "profit", then receive a 20% tax credit on your finance costs. This creates higher taxable income and can push you into higher tax bands.

Using the same example under Section 24:

• Rental income: £20,000
• Allowable expenses (NOT mortgage): £3,000
• Taxable rental profit: £17,000

If you're a 40% taxpayer, you pay £6,800 tax, then receive a £2,400 tax credit (20% of £12,000). Net tax: £4,400.

That's more than double the tax compared to the old system.

Who is most affected by Section 24?

Higher-rate (40%) and additional-rate (45%) taxpayers with mortgaged properties are hit hardest. Basic-rate taxpayers with low other income may see little change. The biggest losers are those who leveraged heavily to build portfolios.

Example calculation: The real impact

Let's compare two landlords with identical portfolios but different other income.

Scenario: Both landlords

• Rental income: £30,000
• Mortgage interest: £20,000
• Other expenses: £2,000

Landlord A: Basic rate taxpayer (no other income)

• Taxable profit: £28,000 (£30k - £2k expenses)
• Tax at 20%: £5,600
• Less 20% credit on £20k interest: £4,000
• Net tax: £1,600

Under the old system, profit would be £8,000, tax £1,600. No change for basic rate.

Landlord B: Higher rate taxpayer (£60,000 salary)

• Taxable profit: £28,000 (added to £60k = £88k total)
• All rental profit taxed at 40%: £11,200
• Less 20% credit on £20k interest: £4,000
• Net tax on rental income: £7,200

Under the old system, profit would be £8,000, tax £3,200. Tax more than doubled.

Strategies to mitigate Section 24

Options include paying down mortgages, transferring to a spouse in a lower tax band, incorporating (with careful analysis), or using capital repayment mortgages. Each has trade-offs.

1. Pay down mortgages

Less debt = less interest = smaller Section 24 impact. But this ties up capital that could be invested elsewhere.

2. Transfer to lower-earning spouse

If your spouse is a basic-rate taxpayer, transferring beneficial ownership can reduce the tax hit. Consider SDLT implications and the "settlements" anti-avoidance rules.

3. Reduce other income

Maximise pension contributions to bring yourself back into the basic rate band. This provides tax relief on the pension contribution too.

4. Review your portfolio

Properties with high loan-to-value ratios may no longer be profitable after tax. Consider selling underperformers.

5. Incorporation

Transfer properties to a limited company. But this triggers CGT on the transfer and potentially higher SDLT. See below.

Should I incorporate to avoid Section 24?

Limited companies CAN deduct mortgage interest in full. However, transferring existing properties triggers Capital Gains Tax on any growth and Stamp Duty at the higher rates. The numbers often don't work for existing portfolios.

Costs of incorporating an existing portfolio:

• Capital Gains Tax: Payable on market value minus original cost (at 18% or 24%)
• Stamp Duty Land Tax: 3% surcharge applies + standard rates on full market value
• Legal and accounting fees: £2,000-5,000+ depending on complexity
• Refinancing costs: Company mortgages often have higher rates

The CGT and SDLT costs can easily exceed years of Section 24 tax increases, especially if you've held properties for a long time.

When does incorporation make sense?

Incorporation typically makes sense for NEW purchases, portfolios with minimal gains, very long holding periods, or landlords who don't need to extract income. Incorporation Relief (Section 162 TCGA) may defer CGT if you meet strict conditions.

Incorporation may work if:

• You're buying NEW properties (no transfer costs)
• Properties haven't increased much in value (low CGT)
• You plan to hold for 20+ years (time to recoup costs)
• You'll retain profits in the company (no extraction tax)
• You qualify for Incorporation Relief under Section 162 TCGA 1992

Section 162 Incorporation Relief can defer CGT when transferring a business, but HMRC scrutinises property businesses closely. You typically need to demonstrate active management, not just passive letting.