I'm a new landlord in the UK, just bought my first buy-to-let. How exactly does Section 24 affect what I can deduct from my rental income for tax? Do I just lose all my mortgage interest relief?
Quick Answer
Section 24 removed the ability for individual landlords to deduct mortgage interest from rental income. Instead, a 20% basic rate tax credit is applied to finance costs.
## Understanding the Section 24 Changes for Individual Landlords
Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how individual landlords can treat finance costs, including mortgage interest, against their rental income. From April 2020, landlords are no longer able to deduct 100% of their mortgage interest payments from their rental income before calculating their tax liability. This change impacts individual landlords in England, Scotland, Wales, and Northern Ireland.
Instead of deducting the interest, a basic rate tax reduction is applied. This reduction is currently set at 20% of the finance costs, which includes mortgage interest, arrangement fees, and loan-related costs. This means that while you still get relief for these costs, it's not a direct deduction from your income, which can significantly alter your overall tax position and potentially your tax band.
### How Does Section 24 Impact Taxable Income?
Section 24 means that your total rental income, less allowable expenses (excluding finance costs), is what's used to calculate your taxable profit. Mortgage interest is then considered separately. For example, if you have £1,000 in monthly rental income and £400 in mortgage interest, your taxable income is calculated on the full £1,000 (minus other expenses), not the £600 you might have declared prior to Section 24. A tax credit of 20% on the £400 interest (equalling £80) is then applied to reduce your final tax bill.
This calculation method can push landlords who were previously basic rate taxpayers into the higher rate bracket because their 'declared' income appears higher. An individual landlord with £30,000 in other taxable income and £20,000 in net rental income (before finance costs), with £10,000 in annual mortgage interest, would previously have declared £10,000 in rental income. Now, they declare the full £20,000, bringing their total income to £50,000, which falls into the higher rate tax band. This makes the 20% credit on their £10,000 interest (a £2,000 tax credit) less beneficial than a full deduction at their marginal tax rate.
## Potential Complications from Section 24
Section 24 specifically targets individual landlords, not companies. This means that if you own your buy-to-let properties personally, you are subject to these rules. Properties held within a limited company, however, are subject to Corporation Tax. The company can still deduct 100% of its finance costs from rental income before Corporation Tax is applied. Corporation Tax is 19% for profits under £50k, 25% for profits over £250k, with marginal relief in between.
Also, for landlords with multiple properties, managing the tax credit calculation across various mortgages can add complexity to annual tax returns. According to HMRC guidance, landlords need to keep meticulous records of all finance costs to accurately claim the 20% tax credit. This shift has led many investors to consider incorporating their property portfolios to mitigate the impact, but this involves other considerations such as Capital Gains Tax and Stamp Duty Land Tax if transferring existing properties.
## Investor Rule of Thumb
Section 24 means individual landlords no longer deduct mortgage interest; instead, they receive a 20% tax credit on finance costs, which can significantly increase taxable income and impact higher rate taxpayers.
## What This Means For You
The impact of Section 24 can be substantial, particularly for higher-rate taxpayers or those with significant mortgage borrowing. It's not just about a reduced tax saving; it’s about a potential shift in your effective income tax band and a higher reported gross income. Most landlords don't lose money because they misunderstand tax rules, they lose money because they don't plan for them. If you want to know the optimal ownership structure and tax strategy for your portfolio, this is exactly what we analyse inside Property Legacy Education.
Steven's Take
When Section 24 was introduced, it was a significant shift for individual landlords. The biggest misconception is that you simply 'lose' the relief. You don't; it's converted to a basic rate tax credit. However, the critical point is that your 'taxable profit' is now higher, often pushing investors into higher tax brackets. This can make a previously profitable deal look less attractive after tax. This change has heavily driven the move towards limited company structures for new acquisitions, where mortgage interest remains a fully deductible expense against income, subject to Corporation Tax rates of 19% or 25%. Understanding this difference is paramount for structuring your investments efficiently.
What You Can Do Next
Review your current tax position - Consult with a qualified property tax advisor to understand how Section 24 specifically affects your individual circumstances and overall tax liability.
Calculate your post-Section 24 net profit - Use a spreadsheet to model your rental income, allowable expenses (excluding finance costs), and then apply the 20% tax credit to see your true post-tax profit for each property.
Consider professional incorporation advice - If you plan to expand your portfolio, speak to a specialist accountant about the pros and cons of holding properties in a limited company versus personally, considering CGT and SDLT implications if transferring existing assets.
Get Expert Coaching
Ready to take action on tax & accounting? Join Steven Potter's Property Freedom Framework for comprehensive, hands-on property investment coaching.