What is Section 24 Finance Cost Restriction?

Full Definition

The Section 24 finance cost restriction is the specific calculation mechanism through which the wider Section 24 reform (Finance (No.2) Act 2015) limits tax relief on mortgage interest and other finance costs for individual buy-to-let landlords, fully in effect since the 2020/21 tax year. Rather than deducting mortgage interest, arrangement fees, and other finance costs from rental income before arriving at taxable profit -- as landlords could before the reform, and as limited companies still can -- individual landlords must now calculate their rental profit with finance costs added back in full, and then separately claim a basic-rate (20%) tax reduction on the lower of their finance costs, their property profits, and their total income above the personal allowance. Because the 20% credit is applied after taxable profit (and therefore the tax band the landlord falls into) has already been calculated using the un-restricted, higher profit figure, higher-rate and additional-rate taxpayers effectively receive relief at only 20% on their finance costs, rather than the 40% or 45% relief they would have received had interest still been deductible as an expense at their marginal rate. Worked example: a higher-rate landlord with £15,000 rental income and £8,000 mortgage interest previously paid tax on £7,000 of profit at 40% (£2,800); under Section 24, they pay tax on the full £15,000 uplifted by the finance costs treatment, then receive a 20% credit worth £1,600 (20% of £8,000), a materially worse outcome, and in some cases the restriction can push a landlord's taxable income into a higher band or trigger loss of personal allowance even though their actual cash profit after the mortgage payment is unchanged or negative. The finance cost restriction does not apply to furnished holiday lettings until the regime's abolition from April 2025, nor to properties held within a limited company (where loan interest remains a normal deductible expense against Corporation Tax), which is why the reform accelerated a wave of landlord incorporations from 2017 onwards, despite the Capital Gains Tax and Stamp Duty Land Tax costs typically triggered by transferring an existing portfolio into a company structure.

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