Guide · Property Tax
Section 24 Mortgage Interest Relief Explained — UK BTL Tax Guide 2025/26
Section 24 of the Finance (No. 2) Act 2015 quietly rewrote the economics of British buy-to-let. Before 6 April 2017 individual landlords deducted mortgage interest from rent like any other business expense. From April 2020 — after a four-year tapered transition — that deduction disappeared entirely, replaced by a flat 20% basic-rate tax credit. For higher-rate and additional-rate landlords the change can mean thousands of pounds of extra tax on what looks, on paper, like exactly the same portfolio. This guide walks through the mechanics, worked examples across all tax bands, edge cases for FHLs and commercial property, and the practical mitigation strategies — incorporation, spouse transfers, pension contributions — that still work in 2025/26.
- Who: individual UK landlords (and certain trusts) with residential BTL borrowing.
- What changed: mortgage interest is no longer a deductible expense — you receive a 20% basic-rate tax credit instead.
- Who's unaffected: limited companies, commercial property, FHLs (until April 2025), rent-a-room.
- Worst hit: higher-rate landlords leveraged at 50%+ LTV — and basic-rate landlords pushed into higher-rate by phantom gross income.
- Reported at: SA105 box 44 (NOT box 26).
What is Section 24?
Section 24 of the Finance (No. 2) Act 2015 inserted new provisions into the Income Tax (Trading and Other Income) Act 2005 — specifically sections 272A and 274A ITTOIA — restricting the deductibility of "finance costs" for individual landlords of residential property. "Finance costs" means mortgage interest, interest on loans to buy furnishings used in the let property, alternative finance returns (Islamic mortgages), and fees and incidental costs of obtaining or repaying that finance. Capital repayments are not finance costs and were never deductible — the restriction concerns only the interest element.
The new rule is straightforward in design but counter-intuitive in effect: instead of subtracting finance costs from rental income before computing taxable profit, you declare rent gross of interest, pay income tax on the (higher) gross figure at your marginal rate, and then receive a separate basic-rate tax reducer equal to 20% of the disallowed finance cost. The mechanics matter because a tax reducer cannot reduce your income tax bill below zero, cannot increase a property loss, and is applied after the personal allowance — so the gross-up effect on declared income drives multiple knock-on consequences that simple arithmetic comparisons miss.
The restriction was phased in to soften the impact:
| Tax year | % of interest deductible as expense | % receiving 20% credit |
|---|---|---|
| 2016/17 and earlier | 100% | 0% |
| 2017/18 | 75% | 25% |
| 2018/19 | 50% | 50% |
| 2019/20 | 25% | 75% |
| 2020/21 onwards | 0% | 100% |
Who's affected — and who isn't
Section 24 catches individuals, partnerships of individuals, and trustees holding residential BTL property in their personal name. Three groups specifically fall outside the restriction and continue to enjoy full interest deductibility — which is why the post-2017 BTL tax-planning landscape revolves around moving income into one of these structures:
- Limited companies — finance costs remain fully deductible against Corporation Tax. This is the dominant mitigation route.
- Commercial property landlords — Section 24 applies only to residential property. Offices, shops, warehouses and industrial units are untouched.
- Furnished Holiday Lets — still fully deductible for 2024/25 and earlier, but the FHL regime is being abolished from 6 April 2025 (see edge cases below).
Rent-a-room income is also unaffected because the relief operates by exempting up to £7,500 of receipts rather than allowing any deductions. Diversified portfolios held in an unincorporated partnership remain caught — there is no "trade" carve-out for property partnerships unless the activity genuinely amounts to a trade (very rare).
Worked examples — same portfolio, different outcomes
All examples assume a landlord with £40,000 of employment income, £15,000 of annual rent and £8,000 of mortgage interest. Non-finance property expenses (insurance, agent fees, repairs) of £2,000 are deductible normally in both regimes. The personal allowance is £12,570 and the basic-rate band ends at £50,270 (2025/26).
Pre-2017 (full deduction)
Property profit = £15,000 − £2,000 − £8,000 = £5,000.
Total taxable income = £40,000 + £5,000 = £45,000.
All comfortably inside basic-rate band → income tax on rental slice = £5,000 × 20% = £1,000.
Net rental income after tax: £4,000.
Post-S24 (2020/21 onwards) — same landlord
Property profit (no interest deduction) = £15,000 − £2,000 = £13,000.
Total taxable income = £40,000 + £13,000 = £53,000.
Slice up to £50,270 taxed at 20%; £2,730 spills into higher rate at 40%.
Income tax on rental slice: £10,270 × 20% + £2,730 × 40% = £2,054 + £1,092 = £3,146.
Less 20% tax reducer: £8,000 × 20% = £1,600.
Net tax on rent = £3,146 − £1,600 = £1,546.
Net rental income after tax: £15,000 − £2,000 − £8,000 − £1,546 = £3,454.
The damage: £546 more tax per year — even though this landlord is fundamentally a "basic-rate" taxpayer with employment income comfortably below the higher-rate threshold.The £8,000 of mortgage interest, added back into taxable income, pushed £2,730 of his profit into the 40% band. The 20% credit recovered some of the lost interest deduction but did nothing to neutralise the band creep. This phantom-income effect — being treated as a higher-rate taxpayer when your real economic position is basic-rate — is the most damaging and least visible consequence of Section 24.
For a landlord already in the higher-rate band before the rental income (say, £55,000 of salary) the damage is starker: the full £13,000 rental profit is taxed at 40% = £5,200, less 20% credit of £1,600 = £3,600 tax on the rent. Pre-S24 the same position would have been £5,000 × 40% = £2,000. Extra tax: £1,600 per year on a single property. Scale that across a five-property portfolio at typical 2025 mortgage rates and the bill can easily reach five figures.
Impact across the tax bands
| Landlord profile | Marginal rate on rent | Net Section 24 impact |
|---|---|---|
| Pure basic-rate (low other income, profit stays under £50,270) | 20% | None — credit matches lost deduction |
| Basic-rate pushed into higher-rate by gross rent | 40% on the spilled slice | Moderate — 20% extra on the band-creep slice |
| Higher-rate (£50,270 – £125,140 of other income) | 40% | Significant — 20% extra on the entire interest amount |
| Additional-rate (£125,140+) | 45% | Maximum — 25% extra on the entire interest amount |
| £100k+ earner | Up to 60% (PA taper) | Severe — gross-up can destroy personal allowance entirely |
| Retiree with state pension + small private pension | 20% → 40% if rent grosses up over threshold | Can push otherwise basic-rate retiree into higher-rate band |
Edge cases and special rules
Joint ownership and Form 17
For property held jointly by a married couple or civil partners, HMRC's default rule is to tax income on a 50:50 basis regardless of beneficial ownership. To deviate — for example to allocate 99% of income to a non-working spouse — the property must be held as tenants in common in unequal shares, and Form 17 must be filed with HMRC within 60 days of the declaration of unequal interests. Form 17 applies prospectively only; it cannot be backdated. The Form 17 + unequal-share split is one of the cleanest ways to neutralise Section 24 when one spouse is a basic-rate or non-taxpayer.
Furnished Holiday Lets — abolition April 2025
Until 5 April 2025 a property meeting FHL conditions (available for short-term letting 210 days/year, actually let for 105 days, average let under 31 days) sits outside Section 24 entirely. Mortgage interest is fully deductible against trading-like income, capital allowances are available on furniture and white goods, and CGT business asset disposal relief can apply on sale. From 6 April 2025 the FHL regime is abolished by the 2024 Spring Budget legislation: former FHLs become ordinary residential property for income-tax purposes — full Section 24 restriction, replacement of domestic items relief in place of capital allowances, and standard CGT residential rates on disposal. Existing FHL owners should consider whether to incorporate, sell, or accept the post-April 2025 regime before transition.
Commercial and mixed-use property
Section 24 applies strictly to residential dwellings. A purely commercial landlord — offices, retail, industrial — deducts mortgage interest in full against rental profits. Mixed-use buildings (shop with flat above) require a just-and-reasonable apportionment of the loan between residential and commercial elements. The residential slice is restricted; the commercial slice is deductible. Keep evidence of the apportionment (floor area or rental value are both accepted).
Rent-a-room relief
Rent-a-room is unaffected because the £7,500 exemption operates by removing income rather than permitting deductions. A homeowner letting a furnished room in their main residence and earning under £7,500 has nothing to declare. Above £7,500 the homeowner can either pay tax on the excess (with no deductions allowed) or opt out and use normal property-business rules (deductions allowed, but residential finance costs restricted by Section 24).
Mitigation strategies that still work in 2025/26
1. Incorporation
Transferring the portfolio into a limited company eliminates the restriction entirely. The trade-offs:
- SDLT on transfer at market value, with the 3% (now 5% from 31 October 2024) higher-rate surcharge on additional dwellings. Incorporation relief under TCGA s162 defers CGT but provides no SDLT escape unless the property is held in a genuine partnership for 2+ years before incorporation (the "partnership incorporation" route).
- CGT on built-in gains unless s162 incorporation relief applies. Relief requires the property business to be a genuine business (active management threshold), all assets transferred wholly or partly for shares, and continuing ownership.
- Higher mortgage rates on Ltd lending — typically 0.5–1.0% above personal BTL, with arrangement fees often 1.5–2.0%.
- ATED for properties held by companies with market value over £500,000 used by a connected individual — exemptions for genuine let-to-third-party are available but annual return required.
- Annual running costs: accountancy, Confirmation Statement, separate bank, dividend planning.
Rough break-even for a higher-rate landlord: 3–8 properties, depending on LTV, location and time horizon. Below that the SDLT/CGT entry cost rarely justifies the annual saving.
2. Spouse transfer + Form 17
See Edge Cases above. For couples with one basic-rate (or non-taxpaying) spouse, transferring beneficial ownership and filing Form 17 can fully eliminate the Section 24 hit on that share.
3. Pension contributions to reclaim Personal Allowance
Where the gross-up effect pushes a landlord over £100,000 of adjusted net income, a relief-at-source personal pension contribution reduces ANI pound-for-pound and recovers PA at an effective rate of ~60% on the recovered slice. This is the single highest-yield tax move for landlords sitting in the £100k – £125,140 taper zone post-Section 24.
4. Salary sacrifice for employed landlords
Employed landlords can reduce their employment income via pension or EV salary sacrifice, bringing total taxable income (including the now-grossed-up rent) back below the higher-rate threshold. Combined with judicious dividend extraction from any owner-managed company, the marginal-rate ladder can often be kept at 20% even with substantial gross rent.
5. Pay down mortgages strategically
Counter-intuitive but real: post-Section 24, capital repayment of BTL mortgages now delivers a higher effective return than pre-2017 because the lost interest deduction no longer offsets the cost of debt. A higher-rate landlord paying 5.5% mortgage interest on £100k is effectively paying 6.6% post-S24 (4.4% interest cost net of 20% credit). For landlords with excess cash, deleveraging is often more efficient than buying additional leveraged stock.
Common mistakes
- Still deducting interest as an expense. The restriction has been 100% since April 2020. Some legacy spreadsheets and accountants still net interest off rent at SA105 box 26 — wrong, triggers HMRC correction.
- Forgetting to claim the 20% credit. Paper filers regularly omit the tax reducer. Online HMRC software adds it automatically — paper submissions need a manual calculation.
- Including residential interest on commercial returns. Mixed-use landlords must apportion; otherwise commercial relief is denied or residential interest is incorrectly allowed.
- Missing the Form 17 60-day window. A late Form 17 is invalid; default 50:50 split reverts and the planning advantage is lost until a fresh declaration.
- Assuming the FHL regime still exists. From 6 April 2025 it does not. Existing FHLs default into ordinary residential treatment.
- Forgetting carried-forward finance costs. Where the restricted figure exceeds property profits, the excess carries forward indefinitely — but only if you track it. There is no specific HMRC box; keep a personal schedule.
Section 24 alongside other reforms
Section 24 does not exist in isolation. Several other 2024/25/26 reforms compound the BTL tax burden:
- HICBC: taper between £60k and £80k ANI from 2024/25 — gross-up effect can drag landlords into the charge.
- Personal Allowance taper: £1 lost for every £2 of ANI above £100,000 — same trap, larger consequence.
- October 2024 CGT residential rates: 18% (basic-rate) and 24% (higher-rate) on disposal — down from 28% but still elevated vs commercial.
- SDLT additional dwellings: raised from 3% to 5% surcharge from 31 October 2024 — making incorporation more expensive at the entry door.
- Dividend allowance: reduced to £500 from April 2024 — affects post-incorporation extraction planning.
The cumulative effect is that BTL in 2025/26 needs to be modelled as a system, not a single tax. Our calculators handle the multi-tax interaction: BTL yield and tax calculator, income tax calculator, SDLT calculator.
How to claim the 20% credit — 5-step Self Assessment walkthrough
- Total residential finance costs — mortgage interest, BTL arrangement fees, furniture-loan interest for the year. Capital repayments excluded.
- Enter at SA105 box 44 — NOT box 26. Box 44 is "Residential property finance costs."
- Calculate the lower of: (a) finance costs, (b) property profits before finance adjustment, (c) adjusted total income above the personal allowance. HMRC online does this automatically.
- Carry forward the restricted excess — if (a) exceeds (b), the surplus rolls forward. Track on a personal schedule; no HMRC box exists for the brought-forward balance.
- Verify on SA302 — confirm the "tax reducer" line equals 20% of the allowed finance cost figure. Errors here are the most common source of underclaimed credit.
gov.uk and HMRC references
- HS340 — Interest and alternative finance payments eligible for relief on qualifying loans (HMRC Helpsheet).
- PIM2054 — HMRC Property Income Manual: restriction on income tax relief for residential finance costs (carry-forward mechanism).
- PIM2050 — General principles for deducting expenses from rental income.
- ITTOIA 2005 ss272A and 274A — the statutory restriction inserted by FA(No.2)A 2015 s24.
- Finance (No. 2) Act 2015, section 24 — the originating legislation.
- SA105 — UK Property pages, where finance costs are reported (box 44).
Bringing it together
Section 24 is not a tax rate change — it is a structural reshaping of how rental income is taxed. A landlord whose pre-2017 net rental income comfortably supported the mortgage may, in 2025/26, be paying meaningfully more tax on identical cash flow. The phantom-income effect cascades into HICBC, the £100k PA taper, and the additional-rate threshold, so the headline 20% credit understates the true damage. The good news is that the mitigation toolkit has matured: incorporation (where the scale justifies it), Form 17 spouse splits, pension top-ups to reclaim PA, and strategic deleveraging all remain effective in 2025/26. The right answer is almost always a mix of these, modelled against the specific portfolio — there is no single silver-bullet structure that works for every landlord.