What is Section 24?
Introduced in 2017 and fully phased in by 2020, Section 24 of the Finance (No. 2) Act 2015 changed how individual landlords claim mortgage interest. You can no longer deduct mortgage interest as an expense against rental income. Instead, you get a 20% tax credit on the interest paid.
Who's affected?
- Individual landlords holding rental property in personal names
- Partnerships of individuals
- Not affected: limited companies (full interest deduction continues), furnished holiday lets (FHLs — but new rules from April 2025 remove this), commercial property
The numbers — worked example
A higher-rate taxpayer with:
- Rental income: £24,000
- Mortgage interest: £12,000
- Other expenses: £4,000
Before Section 24 (pre-2017):
- Taxable profit: £24,000 − £12,000 − £4,000 = £8,000
- Tax at 40%: £3,200
After Section 24 (now):
- Taxable profit: £24,000 − £4,000 = £20,000
- Tax at 40%: £8,000
- Less 20% credit on £12,000 interest: £2,400
- Net tax: £5,600
That's £2,400 more tax on the same rental income — and worse, the higher "profit" can push you into the higher tax band and reduce child benefit / personal allowance.
What can landlords do?
1. Incorporate into a limited company
Pros: full interest deduction restored, 19–25% corporation tax instead of 40–45% income tax Cons: SDLT on transfer (often 3% surcharge), CGT on disposal, refinancing costs, ongoing compliance
Worth modelling carefully — typically beneficial for portfolios of 4+ properties or highly geared landlords.
2. Use spouse's lower tax band
Transfer some/all ownership to a spouse on basic-rate band. Inter-spouse transfers are free of CGT and SDLT (on the equity portion).
3. Switch to commercial / FHL (pre-April 2025 only — rules changing)
Commercial property and qualifying FHLs are outside Section 24. Note: FHL favourable treatment ends April 2025.
4. Reduce gearing
Paying down mortgage debt reduces the tax inefficiency.
Common mistakes
- Trying to "swap" properties between spouses without proper deed and tax planning — HMRC may challenge
- Incorporating without claiming incorporation relief under s.162 TCGA 1992 — leads to a large CGT bill
- Missing the SDLT 3% surcharge when transferring to a company
Ernest & Co specialise in landlord tax planning. Book a free consultation to discuss your portfolio.