How does Section 24 restrict mortgage interest tax relief for landlords?

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Section 24 of the Finance (No. 2) Act 2015 -- phased in from 2017 and fully effective from 6 April 2020 -- fundamentally changed how residential buy-to-let landlords account for mortgage interest (and other finance costs) in their UK tax calculations. **How it worked before Section 24** Prior to the changes, landlords deducted mortgage interest from rental income before calculating taxable profit: - Rental income: £20,000 - Mortgage interest: £10,000 - Taxable profit: £10,000 - Tax (40%): £4,000 **How it works now (from 2020/21 onward)** Mortgage interest is no longer a deductible expense. Instead, landlords calculate tax on gross rental profit (excluding finance costs) and then receive a flat 20% tax credit on finance costs: *Same landlord, now a higher-rate taxpayer:* - Rental income: £20,000 - Other allowable expenses: £2,000 - Taxable profit: £18,000 (mortgage interest not deducted) - Income tax (40%): £7,200 - Less: 20% credit on £10,000 mortgage interest: -£2,000 - **Tax payable: £5,200** (vs £4,000 before) A basic-rate taxpayer is no worse off (they were only ever getting 20% relief, which they still receive via the credit). A higher-rate taxpayer effectively loses the additional 20% relief on finance costs. **The 'loss on paper' problem** If a property technically generates a rental profit that, once tax is applied under Section 24, results in the landlord paying tax despite being cash-flow negative, this can make properties economically unviable -- particularly those purchased with high loan-to-value mortgages. **What finance costs are affected?** - Mortgage interest (main impact) - Loan arrangement fees - Interest on loans used to fund property improvements **What is NOT affected (still deductible)?** - Letting agent fees - Repairs and maintenance (revenue) - Service charges and ground rent (on leaseholds) - Landlord insurance - Professional fees (accountancy, legal for tenancy matters) **Who is exempt from Section 24?** - Companies owning buy-to-let property -- corporate landlords can still deduct finance costs fully (a key driver of the shift toward limited company ownership) - Furnished holiday lets -- although FHL tax advantages were abolished from April 2025, reverting to standard property income rules - Commercial property finance costs Use a self-employed tax or income tax calculator to model the impact of Section 24 on your specific rental portfolio.

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