Section 24 of the Finance Act 2015 restricts individual landlords from deducting mortgage interest from rental income. Instead, a 20% tax credit applies to finance costs. Higher rate taxpayers pay 40% income tax on gross rental profit then receive a 20% credit — effectively paying 20% on the mortgage interest. Limited companies can still deduct mortgage interest in full, making incorporation worth considering for higher rate taxpayer landlords with multiple properties (HMRC, Finance Act 2015, 2026). |
Key facts
- Section 24 phased in from April 2017 and reached full effect from April 2020.
- The mortgage interest tax credit is 20 percent of allowable finance costs.
- Section 24 applies to individual landlords of residential property; commercial property and limited companies are not affected.
- Gross rental income (before mortgage interest) is now used to determine total taxable income.
- The change can push some landlords into the higher-rate or additional-rate income tax band even though their cash position is unchanged.
The pre-2017 position
Before April 2017, individual landlords deducted mortgage interest from rental income before tax. Net rental profit was taxed at the saver's marginal rate. This meant higher-rate landlords effectively received 40 percent relief on their mortgage interest cost.
The phased introduction
Section 24 phased the restriction in over four tax years: 75 percent of interest deductible in 2017 to 2018, 50 percent in 2018 to 2019, 25 percent in 2019 to 2020, and 0 percent from 6 April 2020. From 2020 onwards, no mortgage interest is deductible from rental income.
The basic-rate tax credit
Instead of a deduction, a 20 percent tax credit is given against the landlord's income tax bill, based on the finance costs incurred. For a basic-rate taxpayer who would have received 20 percent relief through the deduction, the credit produces a similar net result. For higher-rate (40 percent) and additional-rate (45 percent) taxpayers, the credit is materially less valuable than the previous deduction.
The 'phantom income' problem
Because gross rent is now included in taxable income before any interest deduction, the landlord's total income on paper is higher than the cash they actually keep. This can push a landlord into a higher tax band, reduce their Personal Allowance (which tapers from GBP 100,000 to nil at GBP 125,140), and trigger the High Income Child Benefit Charge.
Who is affected
Section 24 applies to individual landlords of residential property: sole owners and joint owners (including spouses holding property as joint tenants or tenants in common). Limited company landlords are not affected; they deduct interest as a normal business expense before corporation tax. Furnished holiday lets historically had different rules, which were abolished from 6 April 2025.
What counts as finance costs
Allowable finance costs for the credit include mortgage interest, loan fees, the interest portion of mortgage early redemption charges, and interest on loans used to buy furnishings or improve the property. Capital repayments are not finance costs.
Mitigation routes
Landlords have responded to Section 24 in several ways. Transferring property to a spouse with lower income shifts the tax burden. Incorporating into a limited company avoids Section 24 but triggers SDLT, CGT, and complex re-mortgaging. Some landlords have reduced mortgage debt or sold properties to manage marginal tax bands.
The post-Section 24 economics of buy-to-let
Section 24 of the Finance (No. 2) Act 2015 restricted the tax relief individual UK landlords can claim on residential mortgage interest. From April 2020 the restriction reached full effect: mortgage interest is no longer deducted from rental income, and is instead given as a 20 percent basic-rate tax credit against the income tax bill. The change pushed many higher-rate landlords into higher effective tax positions.
The 'phantom income' problem arises because gross rent (before mortgage interest) is now included in taxable income. This can push a landlord into a higher tax band, reduce their Personal Allowance (which tapers from GBP 100,000 to nil at GBP 125,140), and trigger the High Income Child Benefit Charge. The effective marginal rate on rental income for higher-rate landlords with substantial debt can exceed 60 percent in some scenarios.
Limited company landlords are not subject to Section 24. Companies deduct mortgage interest as a normal business expense before corporation tax. This has driven a substantial shift toward limited company structures for new UK buy-to-let purchases since 2017. The trade-off is double taxation on extracted profits (corporation tax then dividend tax) versus single income tax under personal ownership.
Stamp Duty surcharges and devolved variants
The Stamp Duty Land Tax surcharge for additional dwellings in England and Northern Ireland was introduced at 3 percentage points above standard rates from April 2016 and increased to 5 percentage points from 31 October 2024 under the Autumn Budget 2024. The surcharge applies where the purchaser owns another dwelling anywhere in the world at the end of the day of the purchase, subject to a GBP 40,000 de minimis on the existing interest.
Replacement of the main residence triggers a refund of the surcharge if the old main residence is sold within 36 months of buying the new main home. The refund is claimed through HMRC within 12 months of the sale or the original SDLT filing, whichever is later, and HMRC typically processes straightforward refunds within 15 working days.
Scotland operates the LBTT Additional Dwelling Supplement at 8 percent of the purchase price (raised from 6 percent on 5 December 2024) where the price exceeds GBP 40,000. Wales operates LTT higher rates starting at 5 percent for the first band up to GBP 180,000. Each devolved system has its own thresholds and rates, with replacement-of-main-residence refunds available on similar 36 month terms.
PRA underwriting and stress tests
The Prudential Regulation Authority (PRA), part of the Bank of England, issued Supervisory Statement SS13/16 in 2016 and tightened the rules in 2017. Lenders must apply Interest Coverage Ratio (ICR) tests and stress rates designed to ensure rental income can support the mortgage if interest rates rise. The standard ICR requirements are 125 percent for basic-rate taxpayers and 145 percent for higher and additional-rate taxpayers; many lenders apply 145 percent across the board.
The minimum stress rate is the higher of 5.5 percent or the contractual rate plus 2 percent. Some lenders apply lower stress rates on five-year fixed mortgages where the refinance risk during the fixed period is reduced. Portfolio landlords (four or more mortgaged buy-to-let properties) face additional whole-portfolio assessment under the PRA framework, with the lender reviewing all rental income, all property values, and overall cash flow.
Buy-to-let mortgages are typically interest-only, with the capital repaid through eventual sale or refinancing. LTVs cap at 75 percent at the mainstream segment, with some specialist lenders going to 80 percent. Rates typically run 1 to 2 percentage points above equivalent residential rates, reflecting the higher risk profile.
Licensing, EPCs, and the Renters' Rights Bill
Mandatory HMO licensing under the Housing Act 2004 applies to properties occupied by five or more people forming two or more households who share kitchen, bathroom, or toilet facilities. Additional HMO licensing schemes (covering smaller HMOs) and selective licensing schemes (covering all rentals in a designated area) can be designated by individual local authorities. Operating an unlicensed property where a licence is required is a criminal offence with unlimited fines on prosecution or civil penalties of up to GBP 30,000.
The Energy Performance Certificate minimum standard for rented properties is currently an E rating under the Minimum Energy Efficiency Standards (Private Rented Sector) Regulations 2015. Properties below E cannot be let unless an exemption is registered on the PRS Exemptions Register. Government proposals to raise the minimum standard to C have been the subject of successive consultations; the timetable is uncertain.
The Renters' Rights Bill, currently progressing through Parliament, abolishes Section 21 no-fault eviction, converts assured shorthold tenancies into rolling periodic tenancies, expands Section 8 grounds for possession (including for sale of the property and owner or family-member occupation), creates a Private Rented Sector Database (a landlord register), and creates a new Ombudsman. Commencement depends on royal assent and the Secretary of State's commencement orders.
Capital gains tax on sale
Capital gains on buy-to-let sales by individuals are taxed at 18 percent (basic-rate band) or 24 percent (higher and additional-rate bands) on residential property from 30 October 2024 onwards. The annual exempt amount is GBP 3,000 from the 2024 to 2025 tax year. Where the property was at some point the seller's main residence, Private Residence Relief can shelter the period of occupation plus the final 9 months of ownership.
The disposal must be reported to HMRC and any CGT paid within 60 days of completion using the UK Property Disposals service on gov.uk. The 60 day window is significantly shorter than the original 30 day rule introduced in April 2020 and the standard Self Assessment timetable. Joint owners report individually on their share of the gain.
Income tax on rental profit in detail
Rental profit is reported on the property pages of the Self Assessment return for individual landlords. Allowable deductible expenses include letting agent fees, insurance, repairs and maintenance (but not capital improvements), ground rent and service charges, professional fees, accountant fees, council tax and utilities where paid by the landlord, advertising costs, and travel costs related to managing the property. Mortgage interest is no longer deductible from rental income under Section 24 but produces a 20 percent basic-rate tax credit.
Replacement of Domestic Items relief allows the cost of replacing furnishings, white goods, and similar items in a let property to be deducted from rental income. The relief replaced the previous Wear and Tear Allowance from 6 April 2016. The replacement cost must be of a like-for-like item; the deduction is limited to the value of an equivalent replacement, not an upgrade.
Where a property is jointly owned by spouses, the rental income is treated as 50/50 by default. A Form 17 election can change the split to reflect actual beneficial ownership where the beneficial ownership is documented (typically through a deed of trust). The election is widely used to allocate more income to the lower-earning spouse and reduce overall tax liability.
Repairs versus capital expenditure distinction
The distinction between repairs (deductible against rental income) and capital improvements (added to base cost for CGT) is a frequent area of dispute with HMRC. A repair restores the property to its previous condition; an improvement enhances it beyond the original specification. Replacing a kitchen with a similar new kitchen is a repair; replacing a small kitchen with a much larger or higher-specification kitchen is a capital improvement.
The de minimis test is fact-sensitive. HMRC's Property Income Manual provides guidance on specific scenarios. Where significant work has been done, landlords typically need to apportion between repair and capital elements. Professional accountancy advice is useful for material refurbishments and renovations.
Devolved nation property rules
Scotland operates Land and Buildings Transaction Tax (LBTT) under the Land and Buildings Transaction Tax (Scotland) Act 2013 with the Additional Dwelling Supplement currently 8 percent of the purchase price where the price exceeds GBP 40,000. The Scottish housing market also has the distinct Private Residential Tenancy (PRT) regime under the Private Housing (Tenancies) (Scotland) Act 2016, which abolished no-fault evictions from December 2017.
Wales operates Land Transaction Tax (LTT) under the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017 with higher rates for additional dwellings starting at 5 percent. The Renting Homes (Wales) Act 2016, in force from 1 December 2022, replaced ASTs with 'occupation contracts'. Northern Ireland operates under the Stamp Duty Land Tax regime with the additional dwellings surcharge applied at 5 percentage points from 31 October 2024.
Where to get further help
MoneyHelper at moneyhelper.org.uk provides free impartial guidance on UK personal finance topics from the Money and Pensions Service. Citizens Advice at citizensadvice.org.uk provides free advice on benefits, debt, housing, and consumer issues. The FCA's consumer pages at fca.org.uk/consumers cover regulated financial products with consumer-focused explanations. For complaints about regulated firms, the Financial Ombudsman Service at financial-ombudsman.org.uk handles disputes with award limits of GBP 430,000 for cases referred from 1 April 2024.
For specialist topics, professional bodies maintain accreditation registers and consumer information. The Society of Trust and Estate Practitioners at step.org lists qualified estate planners; the Law Society at lawsociety.org.uk lists qualified solicitors; the Personal Finance Society and the Chartered Insurance Institute maintain registers of qualified financial advisers. For regulated financial advice, the FCA Register at register.fca.org.uk is the authoritative check on firm authorisation.
Disclaimer
This article provides general information on Section 24 and is not personal tax advice. Tax rules are complex and individual circumstances differ; professional advice is recommended.
Frequently asked questions
Does Section 24 apply to commercial property?
No. The restriction applies only to residential property held by individuals.
Does the restriction apply to overseas property?
Yes, where the landlord is UK resident and the income is reportable in the UK.
Can a landlord deduct other costs?
Yes. Letting agent fees, insurance, repairs and maintenance, ground rent, and other property running costs remain fully deductible.
Does Section 24 apply to limited companies?
No. Limited companies continue to deduct interest as a business expense before corporation tax.
How is the credit calculated in Self Assessment?
The finance costs are entered separately on the property pages. The 20 percent credit is calculated and applied against the income tax liability, with the unused portion (if any) carried forward.
Frequently asked questions
Does Section 24 apply to commercial property?
No. The restriction applies only to residential property held by individuals.
Does the restriction apply to overseas property?
Yes, where the landlord is UK resident and the income is reportable in the UK.
Can a landlord deduct other costs?
Yes. Letting agent fees, insurance, repairs and maintenance, ground rent, and other running costs remain fully deductible.
Does Section 24 apply to limited companies?
No. Limited companies continue to deduct interest as a business expense before corporation tax.
How is the credit calculated in Self Assessment?
Finance costs are entered separately on the property pages. The 20 percent credit is applied against the income tax liability.
