01

The pre-Section 24 world versus now — what changed and why it matters

Before Section 24, individual landlords could deduct mortgage interest from gross rental income before calculating the taxable profit. The taxable figure was economic profit — what remained after all costs including financing. For a higher rate landlord with £18,000 rent, £8,000 mortgage interest and £2,000 other costs: taxable profit = £8,000, income tax at 40% = £3,200.

From April 2020 under Section 24: mortgage interest is no longer deductible. The taxable profit is £18,000 - £2,000 = £16,000. Tax at 40% = £6,400. Then a tax credit of 20% × £8,000 = £1,600 is applied. Net tax = £4,800. Additional tax versus the old rules: £1,600 per property per year for this landlord.

The change is not a reduction in the rate of relief — it is a structural change in what is treated as profit. Under the old system, the landlord's economic profit was £8,000 and they paid tax on £8,000. Under Section 24, HMRC treats the landlord as having £16,000 of profit (ignoring the financing cost) and then gives a partial credit. The effective tax rate on the same economic activity has increased from 40% to 60% for higher rate landlords with significant mortgage interest.

The rate at which Section 24 increases tax depends on the mortgage interest as a proportion of gross rent. High loan-to-value buy-to-lets in low-yield markets (London, where gross yields average 3 to 4%) are most severely affected. Low-loan-to-value properties or properties with high gross yields (8 to 10% in some northern markets) are less affected because the mortgage interest represents a smaller fraction of gross rent.

02

The Section 24 credit calculation — worked through for every taxpayer type

The Section 24 credit mechanism works as follows. Step 1: calculate the property income profit excluding mortgage interest deduction. Step 2: apply income tax at the relevant marginal rate to the full profit. Step 3: deduct the Section 24 credit, which is 20% of the lower of: (a) the mortgage interest paid, (b) the property income profit before the credit, or (c) the adjusted net income of the taxpayer.

The 'lower of' rule is important: if the property income profit before the credit is less than the mortgage interest paid (a loss-making property on an economic basis), the credit is limited to 20% of the profit — not 20% of the full interest. This prevents the credit from generating a tax refund in excess of the tax charged.

Basic rate landlord (total income within basic rate band): taxable profit £16,000. Tax at 20% = £3,200. Credit = 20% × £8,000 = £1,600. Net tax = £1,600. Old rules: taxable profit £8,000. Tax at 20% = £1,600. Net tax = £1,600. No change — basic rate landlords are financially unaffected by Section 24. The 20% credit exactly equals the 20% rate they would have paid on the deducted interest.

Higher rate landlord: taxable profit £16,000. Tax at 40% = £6,400. Credit = £1,600. Net tax = £4,800. Old rules: net tax = £3,200. Additional cost: £1,600 per year.

Additional rate landlord: taxable profit £16,000. Tax at 45% = £7,200. Credit = £1,600. Net tax = £5,600. Old rules: taxable profit £8,000. Tax at 45% = £3,600. Additional cost: £2,000 per year.

Personal allowance trap: Section 24 inflates the taxable profit figure used to calculate adjusted net income. A landlord with employment income of £90,000 and rental profit of £5,000 under old rules has adjusted net income of £95,000 — below the £100,000 personal allowance trap. Under Section 24, the same landlord has taxable rental profit of £13,000 (excluding the £8,000 interest) — adjusted net income of £103,000 — inside the 60% trap.

03

Legitimate mitigation strategies — what works and what does not

Several strategies are available to individual landlords to manage the Section 24 impact. Not all are equally effective or appropriate for all landlords.

Strategy 1 — Pension contributions: a pension contribution reduces adjusted net income, which is the figure used in the Section 24 credit calculation (specifically the 'lower of' rule's third limb). More importantly, a pension contribution can pull a landlord's adjusted net income below £100,000 if they are in the personal allowance trap zone, reducing the effective rate on rental income from 60% back to 40%.

Strategy 2 — Limited company for new purchases: the limited company route is not a Section 24 mitigation for existing personally held properties — the transfer cost (CGT plus SDLT) is typically prohibitive. But for new purchases, using a limited company from the outset avoids Section 24 entirely — companies deduct mortgage interest in full at the corporation tax rate.

Strategy 3 — Reducing mortgage leverage: selling a portion of the portfolio or overpaying the mortgage reduces the mortgage interest that creates the Section 24 exposure. For landlords in the personal allowance trap, reducing mortgage interest below the level that triggers adjusted net income above £100,000 can be economically rational.

Strategy 4 — Joint ownership with a basic rate taxpaying partner: transferring ownership (or purchasing jointly from the outset) with a spouse who is a basic rate taxpayer splits the rental income — the higher rate partner's share is reduced, limiting the Section 24 exposure. Joint ownership requires genuine legal co-ownership, not merely a sharing arrangement.

Strategies that do not work: claiming mortgage payments as capital repayments against cost (mortgage repayment has never been deductible); re-characterising the rental property as a trading business to claim full deduction (HMRC does not accept residential letting as a trading business for this purpose); or using a company as a nominee while personally financing the mortgage (the company must genuinely own and finance the property).

04

Section 24 and furnished holiday lettings — what changed in April 2025

The furnished holiday lettings (FHL) regime was abolished from 6 April 2025. Under the pre-April 2025 FHL rules, qualifying holiday lets were exempt from Section 24 — they could deduct mortgage interest in full as a legitimate business expense. This exemption was one of the most significant remaining advantages of FHL status.

From April 2025, all residential lettings — including former FHLs — are subject to Section 24. The transition means: landlords who planned their holiday let business around FHL mortgage interest deductibility must now model the impact of Section 24 on their properties specifically. For highly leveraged holiday lets in high-value areas (Cornwall, Lake District, the Cotswolds), the transition to Section 24 can significantly impair the economic model.

The abolition of FHL status also removed: the ability to treat FHL income as earned income for pension contribution purposes; capital allowances on furniture and fixtures; and business asset disposal relief on disposal. The combined effect on a FHL landlord who used all these reliefs is substantial.

Transitional planning: FHL landlords who had planned to sell and claim BADR should take urgent specialist advice. The disposal of former FHL properties now does not qualify for BADR unless the property meets the independent business activity tests under the trading activity rules — which most residential letting activities do not. The window for selling under the old regime closed on 5 April 2025.

05

The portfolio review every Section 24 affected landlord should do now

Section 24 has been fully operational for six years. Many landlords adapted their strategies in the early years — switching to limited companies for new purchases, selling underperforming properties, or reducing leverage. But those who did not adapt may be operating at a significant ongoing tax disadvantage without a clear picture of the full impact across their portfolio.

The portfolio review should calculate for each property: the gross rental income; all allowable expenses excluding mortgage interest; the taxable profit under Section 24; the Section 24 credit; the net income tax payable; the economic profit after all costs including mortgage repayment; and the comparison between what is being paid in income tax versus what would have been payable under the old rules.

For landlords where Section 24 has created a position where income tax is being paid on an economic loss (net rental income after all costs including mortgage repayment is negative): the property is destroying wealth. Retaining it is a rational choice only if expected capital appreciation is sufficient to compensate — and this must be modelled explicitly, not assumed.

For landlords where Section 24 has created a personal allowance trap problem (adjusted net income above £100,000 due to Section 24-inflated taxable profit): pension contributions, gift aid donations and portfolio restructuring should be evaluated urgently against the 60% effective rate being paid.