I'm considering buying my first BTL property; does Section 24 mean I can't deduct any mortgage interest, and how does this affect my expected net rental income compared to pre-2017 rules?
Quick Answer
Section 24 restricts individual landlords from deducting mortgage interest from rental income, replacing it with a 20% tax credit. This reduces net income, especially for higher-rate taxpayers, compared to pre-2017 rules.
## What is Section 24 and how does it affect mortgage interest deductions?
Section 24 of the Finance (No. 2) Act 2017, fully implemented since April 2020, means individual landlords can no longer deduct finance costs, including mortgage interest, from their property rental income before calculating taxable profit. Instead, landlords receive a basic rate income tax reduction equivalent to 20% of their finance costs. This represents a significant shift from the previous system where all mortgage interest was a fully deductible expense.
This rule applies to all individual landlords, whether they own one property or multiple, and for all types of residential buy-to-let (BTL) properties. It does not apply to properties held within a limited company structure, where mortgage interest remains a deductible expense against company profits. Holiday lets, if treated as Furnished Holiday Lettings (FHLs) for tax purposes, may also have different rules.
## How does the post-Section 24 system impact expected net rental income?
The post-Section 24 system effectively reduces a landlord's net rental income, particularly for higher and additional rate taxpayers. Under the old rules (pre-2017), the full mortgage interest amount was subtracted from rental income to arrive at a net profit, which was then taxed at the individual's marginal income tax rate (e.g., 40% or 45%). Now, the full rental income is taxed, and only a 20% credit is applied to the mortgage interest. This means that a portion of the rental income that previously went to cover mortgage interest, and was therefore untaxed, is now subject to tax.
Consider an example: a property generating £15,000 p.a. in rental income with £10,000 p.a. in mortgage interest.
* **Pre-2017:** Taxable profit was £5,000 (£15,000 - £10,000). A higher-rate taxpayer would pay £2,000 in tax (40% of £5,000).
* **Post-2020:** Taxable income is £15,000. Interest relief is £2,000 (20% of £10,000). If a higher-rate taxpayer, gross tax is £6,000 (40% of £15,000), less the £2,000 credit, resulting in £4,000 tax payable. This means the landlord's income has effectively halved from £3,000 (pre-tax of £5,000 less £2,000 tax) to £1,000 (£5,000 net income less £4,000 tax). This is a substantial reduction in effective net rental income for higher-rate taxpayers.
## Does this mean limited companies are always better for BTL property?
While limited companies are exempt from Section 24, allowing them to deduct mortgage interest as a business expense, they come with other tax considerations. Limited companies pay Corporation Tax on profits (19% for profits under £50k, 25% for profits over £250k as of December 2025). Extracting profits from a company typically incurs further tax, such as dividend tax. Basic rate taxpayers often find that direct individual ownership can still be more efficient or comparable, depending on their overall income and investment strategy.
For example, if you are a basic rate taxpayer and your rental income does not push you into a higher tax bracket, the 20% tax credit under Section 24 might align closely with the tax relief under the old system. The complexity and ongoing costs of running a limited company also need to be factored in, such as additional accountancy fees. The optimal structure depends on individual financial circumstances and long-term investment goals.
## How does Section 24 affect property stress tests and affordability?
Lenders' stress tests for BTL mortgages now generally consider the impact of Section 24. A typical BTL stress test requires rental coverage of 125% at a notional interest rate of 5.5% as of December 2025. For limited companies, the stress test might be more lenient, potentially 125% or 145% at a lower notional rate, as the interest is deductible. Individual landlords, however, might find their borrowing capacity reduced as the lender considers their post-tax rental income.
For a property needing to cover a £1,000 monthly mortgage interest payment, an individual landlord would need monthly rent of at least £1,375 (£1,000 x 1.25 x 1.1) to account for higher tax liability, compared to potentially £1,250 for a limited company in some cases. This difference directly impacts affordability and the ability to secure financing, especially with current BTL mortgage rates ranging from 5.0-6.5% for 2-year fixed terms. Property investors must consider their ability to meet the updated rental coverage requirements.
Steven's Take
Section 24 has fundamentally changed the buy-to-let landscape for individual landlords. The 20% tax credit on finance costs, while better than nothing, severely compresses net profit for higher-rate taxpayers. It's no longer just about gross rent minus interest; you have to factor in that your entire rental income is taxed, then a credit applied. This means focusing on higher-yielding properties, or seriously considering a limited company structure if you're a higher-rate taxpayer, becomes even more critical. The days of casual BTL property investment for those with significant other income are largely behind us; it requires precise financial modelling and strategic structuring.
What You Can Do Next
1. Calculate your projected net rental income under Section 24 rules: Use an online calculator or spreadsheet to apply the 20% tax credit to your estimated mortgage interest. Compare this to your income tax bracket – gov.uk/income-tax-rates for current rates.
2. Consult with a property tax accountant: Discuss your specific financial situation and explore whether individual ownership or a limited company structure is more tax-efficient for you. Search for 'property tax specialist' on ICAEW.com.
3. Review BTL mortgage stress tests: Understand how lenders calculate your affordability under the new rules. Speak to an experienced BTL mortgage broker or check lenders' websites for their specific ICR (Interest Cover Ratio) requirements, usually 125% coverage at a notional rate.
4. Research alternative investment vehicles: If Section 24 significantly impacts your returns, explore other property investment strategies or structures such as Furnished Holiday Lets (which have different tax rules) or commercial property, which are not subject to Section 24.
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