How do rising tracker mortgage rates affect a landlord's tax position?

Full answer

Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how UK residential landlords can use mortgage interest costs to reduce their tax bills. The interaction with rising tracker rates is particularly painful. **Pre-Section 24 vs post-Section 24** Before April 2017, mortgage interest was a deductible expense — a higher-rate taxpayer paying £6,000 in interest on a £150,000 buy-to-let mortgage would save £2,400 in tax (40% of £6,000). Now that same £6,000 interest only generates a 20% tax credit of £1,200 — half the relief. **Impact of tracker rate rises** A tracker mortgage tracks the Bank of England base rate + a fixed margin. If the base rate rises 0.5%, annual interest on a £200,000 mortgage increases by £1,000. A basic-rate landlord gains a £200 tax credit on that extra interest — close to the actual cost. A higher-rate landlord gains only £200 credit but pays 40% tax on the additional rental profit untouched by the interest deduction. **Worked example** Rental income £18,000; expenses (excluding interest) £3,600; mortgage interest £9,000 after rate rise. - Taxable profit = £18,000 − £3,600 = £14,400 (Section 24 means interest is NOT deducted here) - Tax at 40% = £5,760 - Less 20% credit on interest: £9,000 × 20% = £1,800 - Net tax = £3,960 Compare with a basic-rate taxpayer: tax at 20% = £2,880 − £1,800 credit = £1,080. The higher-rate landlord pays 3.7× more tax despite the same property. **Mitigation strategies** - Incorporate the property portfolio (company pays corporation tax, can deduct interest fully) - Overpay the mortgage to reduce the balance and therefore the interest - Consider switching to fixed rates to cap future interest exposure