Section 24 (mortgage interest relief)

Why it matters

Because finance costs no longer reduce taxable income, your reported property profit is larger than your real profit. That inflated figure feeds into everything income-based: it can push a basic-rate taxpayer into the higher rate, trigger the high income child benefit charge, taper the personal allowance above 100,000 pounds, and affect student loan repayments. Highly geared portfolios held personally can end up paying tax that exceeds their actual cash profit.

Legal requirements

• The restriction applies to individuals, partnerships with individual partners, and trustees letting residential property in the UK and overseas.
• It does not apply to companies, which continue to deduct interest as a normal business expense.
• It does not apply to commercial property, and furnished holiday lettings lost their exemption when the FHL regime was abolished from April 2025.
• Restricted finance costs include mortgage and loan interest, interest on loans to buy furnishings, and incidental costs of obtaining finance such as arrangement and broker fees.
• The tax reducer is the lower of 20 per cent of finance costs, 20 per cent of property profits, or 20 per cent of adjusted total income above the personal allowance. Unused amounts carry forward.

Common mistakes

• Still deducting mortgage interest as an expense in the accounts, which overstates the relief and understates the tax due.
• Forgetting that capital repayments were never deductible — only the interest element was, and now that is restricted too.
• Assuming incorporation is automatically the answer without modelling stamp duty, capital gains tax, higher company mortgage rates and the tax cost of extracting profit.
• Missing carried-forward unused finance cost reducers from earlier loss-making years.
• Overlooking the knock-on effects on child benefit, the personal allowance taper and student loan repayments.

Practical guidance

• Model your position with and without the add-back before making any structural decision.
• Keep a schedule of finance costs and unused reducers carried forward, year by year.
• Take regulated tax advice before incorporating — the transaction costs usually dwarf the annual saving for small portfolios.
• Remember Making Tax Digital for income tax brings quarterly reporting for landlords above the turnover thresholds, so clean records matter more each year.

Worked example

A landlord has rental income of 30,000 pounds, mortgage interest of 12,000 pounds and other allowable expenses of 4,000 pounds, plus employment income of 40,000 pounds. Before section 24 the taxable property profit was 14,000 pounds. Under section 24 the taxable profit is 26,000 pounds, so total income becomes 66,000 pounds and part of the profit is taxed at 40 per cent. The 20 per cent credit on 12,000 pounds gives 2,400 pounds back. The net result is materially more tax than the pre-2017 position on identical cash flows — and the higher reported income is what lenders, HMRC and the child benefit charge all see.

Who is actually affected

If you are a basic-rate taxpayer and remain a basic-rate taxpayer after adding back the finance costs, section 24 is broadly neutral for you. The pain concentrates on higher and additional rate taxpayers, on landlords whose added-back interest tips them over 50,270 pounds, over 60,000 pounds where child benefit is claimed, or over 100,000 pounds where the personal allowance tapers, and on any landlord with high loan-to-value borrowing on thin margins.

The options landlords actually have

Incorporating into a limited company restores full interest deductibility, but it is a disposal for capital gains tax and usually triggers stamp duty land tax, and company mortgage rates are typically higher — incorporation relief under section 162 TCGA 1992 may be available where the letting amounts to a business, which is a question of fact. Transferring a share to a lower-earning spouse can move profit into a lower band, using a declaration of trust and, for married couples, a Form 17 election where beneficial ownership is unequal. Reducing gearing, switching to commercial or semi-commercial stock, or accepting a lower yield with less debt are the non-structural options. None of these is universally right, and all of them have costs.

Getting the return right

Report the residential finance costs in the dedicated box on the property pages of the self assessment return — not as an ordinary expense. Any part of the reducer you cannot use in a year because profits or income are too low is carried forward to future years indefinitely, so keep a running record. Where a mortgage covers both residential and commercial property, apportion the interest on a just and reasonable basis and document the method.