What is Section 24 Mortgage Interest Restriction?

Full Definition

Section 24 of the Finance (No. 2) Act 2015 restricts the tax relief individual landlords can claim on mortgage interest and other finance costs (such as mortgage arrangement fees) for residential let properties, fully phased in since the 2020/21 tax year. Before the change, a landlord simply deducted mortgage interest as a business expense from rental income before calculating tax, in the same way any other cost of running the letting business was deducted; under Section 24, interest and finance costs can no longer be deducted from rental income at all when calculating taxable profit -- instead, the landlord receives a basic-rate (20%) tax credit applied against their final tax bill, calculated on the lower of their finance costs, their property income, or their total income exceeding the Personal Allowance. The practical effect is that a landlord's taxable rental profit is now calculated as if no mortgage interest had been paid at all, which can push their total taxable income into a higher tax band even though their actual cash profit after the mortgage is much lower, because the 20% credit only offsets tax at the basic rate regardless of what rate the landlord actually pays on that income. Higher and additional rate taxpayers are hit hardest, since they effectively only get 20% relief on finance costs that would previously have saved tax at 40% or 45%, and in the most extreme cases a highly geared landlord can find their tax bill exceeds their real rental profit once mortgage payments are accounted for. The restriction applies only to individual landlords holding property personally; landlords who hold their portfolio through a limited company are unaffected and can continue to deduct mortgage interest as a normal expense before calculating corporation tax, which is a major reason many landlords have incorporated their buy-to-let portfolios since Section 24 was introduced. Worked example: a higher-rate taxpayer landlord with £15,000 of rental income and £8,000 of mortgage interest on a personally held buy-to-let now pays 40% tax on the full £15,000 (minus any other deductible expenses, but not the interest), giving a tax bill before the credit of potentially £6,000, then receives a 20% credit on the £8,000 finance cost (£1,600) to reduce the bill to £4,400 -- compared with the pre-2020 system, where the £8,000 interest would simply have been deducted before tax, taxing only £7,000 of profit at 40% for a £2,800 bill, illustrating the higher overall tax burden the restriction creates for geared, higher-rate landlords.

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