Buy-to-Let Mortgage Interest Tax Relief 2026/27: How Section 24 Actually Works
Landlords can no longer deduct mortgage interest from rental income before tax — instead, they get a 20% tax credit. For higher-rate landlords especially, this Section 24 change has significantly increased effective tax bills. Here's the calculation.
What Changed and Why It's Called Section 24
Section 24 of the Finance (No. 2) Act 2015 phased in a fundamental change to how individual landlords are taxed on mortgage interest, fully in effect since April 2020. Previously, mortgage interest was deducted from rental income like any other business expense, before calculating taxable profit. Now, for individually-held (non-corporate) rental property:
- Rental profit is calculated without deducting mortgage interest or other finance costs.
- Tax is charged on this full (higher) profit figure, at the landlord's marginal rate.
- A separate tax reduction — a credit — worth 20% of the finance costs is then deducted from the final tax bill.
This restructuring means the tax benefit of mortgage interest is now fixed at the basic rate (20%), regardless of what tax band the landlord is actually in.
Worked Example: Basic-Rate vs Higher-Rate Landlord
Both landlords have a property earning £15,000 rental income, with £8,000 mortgage interest and £2,000 other allowable expenses (agent fees, insurance, repairs).
| Step | Basic-rate landlord | Higher-rate landlord |
|---|---|---|
| Rental income | £15,000 | £15,000 |
| Other allowable expenses deducted | £2,000 | £2,000 |
| Taxable rental profit (interest NOT deducted) | £13,000 | £13,000 |
| Tax rate | 20% | 40% |
| Tax on £13,000 | £2,600 | £5,200 |
| 20% tax credit on £8,000 mortgage interest | £1,600 | £1,600 |
| Final tax due | £1,000 | £3,600 |
| Actual cash profit (£15,000 − £2,000 − £8,000 mortgage interest) | £5,000 | £5,000 |
| Effective tax rate on real cash profit | 20% | 72% |
This example illustrates the core problem for higher-rate landlords: on a genuine cash profit of £5,000, the higher-rate landlord pays £3,600 in tax — an effective rate on real profit far above their nominal 40% tax band, because the 20% credit doesn't fully offset the tax charged on interest that's now counted as taxable profit.
The "Pushed Into a Higher Band" Problem
Because the full, un-reduced rental income counts towards total income when determining which tax band applies, some landlords who would be basic-rate taxpayers based on cash profit alone find their gross rental profit (before the interest credit) pushes their total income over the £50,270 higher-rate threshold for 2026/27 — meaning some or all of their rental profit, and potentially some of their other income too, is taxed at 40% rather than 20%, even though their genuine take-home profit after mortgage interest is modest.
This is one of the most heavily criticised structural effects of Section 24 — it can create tax liabilities on properties that generate little or even negative cash profit once the actual mortgage payment is accounted for.
Limited Company Ownership: The Alternative Structure
Properties held within a limited company are not subject to Section 24 — the company deducts mortgage interest as a normal business expense before calculating its Corporation Tax liability.
| Feature | Individual ownership | Limited company ownership |
|---|---|---|
| Mortgage interest deduction | Restricted to 20% tax credit | Fully deductible before tax |
| Tax on profit | Income tax (20/40/45%) | Corporation Tax (19-25% for 2026/27, depending on profit level) |
| Extracting profit for personal use | Direct — it's already personal income | Requires salary/dividend extraction, taxed again at that stage |
| Mortgage products available | Wide range, standard buy-to-let rates | Narrower range, sometimes higher rates, specific limited company BTL products |
| Transferring existing personally-held property into a company | Can trigger CGT and SDLT as if selling to a third party | N/A if buying new within the company from the start |
Incorporation is a significant decision with real costs and complexity — particularly the CGT and SDLT triggered by transferring an already-owned property into a company structure — and isn't automatically the right answer for every landlord. It tends to be considered most seriously by landlords with larger portfolios, high finance costs relative to profit, and firmly higher-rate tax status, where the ongoing Section 24 impact is most severe.
Furnished Holiday Lettings: The Rules Changed Too
Furnished Holiday Lettings previously benefited from a distinct, more favourable tax regime — including full mortgage interest deductibility, exemption from Section 24, and certain Capital Gains Tax reliefs unavailable to standard residential lets. This special FHL status was abolished from April 2025, bringing holiday let properties broadly in line with the same finance-cost restriction rules that apply to standard buy-to-let property.
Landlords with holiday let properties who previously relied on the FHL regime's more generous treatment should review their current position carefully, as this represents a significant change from the previous, more favourable rules.
Practical Steps for Affected Landlords
- Calculate your actual effective tax rate on cash profit (not just your nominal tax band) to understand the real Section 24 impact on your specific portfolio.
- Consider whether incorporation makes sense, factoring in the CGT/SDLT cost of any transfer, ongoing Corporation Tax and extraction tax, against the benefit of full interest deductibility — professional tax advice is strongly recommended given the complexity and the permanence of some of these decisions.
- Review mortgage structuring — for landlords with multiple properties and mortgages, refinancing decisions can sometimes be structured to manage the overall finance-cost position, though this needs careful individual analysis.
- Keep the 20% tax credit calculation correct on Self Assessment — this is a distinct calculation from ordinary expense deduction and needs to be applied correctly on the relevant property income pages of the return.
Frequently asked questions
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