Since 6 April 2020, individual residential landlords in the UK can no longer deduct mortgage interest from rental profits. Under Section 24 of the Finance (No. 2) Act 2015, they instead receive a tax credit equal to 20% of qualifying finance costs, applied against their income tax liability. This applies regardless of the landlord's tax band and cannot generate a refund.
This restriction was phased in from April 2017: landlords could deduct 75% of finance costs in 2017/18, 50% in 2018/19, and 25% in 2019/20, before the full restriction took effect in April 2020. From April 2025, the same Section 24 rules apply to former Furnished Holiday Let landlords following the abolition of the FHL regime. This article explains how the Section 24 calculation works, walks through worked examples, and covers what landlords can do about it.
How Is the Section 24 Tax Credit Calculated?
The buy-to-let mortgage interest tax relief, often referred to as mortgage interest tax relief, is a tax credit available to landlords. This relief allows landlords to reduce their tax liability based on a specified amount. The eligible deduction is calculated at 20% of the lower of the following:
- Unrecovered Finance costs - i.e., the costs not deducted from rental income in the current year.
- Property business profits - i.e., the profits of the property business in the tax year, after accounting for any losses carried forward.
- Adjusted total income - i.e., the individual's total income minus the personal allowance.
The restriction is put in place to ensure that the reduction is not used to create a tax refund. The next section contains a few examples incorporating these restrictions.
Section 24 Examples: How It Affects Basic and Higher Rate Landlords
Let's understand the mechanism of the relief in detail, as well as the cases where the relief may be restricted, with a few examples.
Example 1 - When the finance cost exceeds property business profits ,
Let's visit Mr Henry's situation to understand the procedure for computing the BTL mortgage relief. In the tax year 2023/24, Mr Henry earns a profit of £20,000 from his buy-to-let business but incurs £30,000 a year in mortgage interest. Additionally, he has an employment income of £25,000. His income tax can be calculated as follows:
First, let's translate these figures into numbers:
- Finance costs - £30,000
- Property business profits - £20,000
- Adjusted total income - £32,430 (20,000+25,000-12,570)
In this instance, the lower of the three figures is the property business profits (£20,000). Therefore, the mortgage relief will be restricted to 20% of the property business profits. Consequently, his income tax liability would be calculated as follows:
Particulars | Amount (£) |
|---|---|
Employment income | 25,000 |
Property income | 20,000 |
Less: personal allowance | (12,570) |
Taxable Income | 32,430 |
Income tax liability (32,430@ 20%) | 6,486 |
Less: Mortgage interest tax relief (20% of £20,000) | (4,000) |
Income tax payable | 2,486 |
Therefore, Mr Henry is liable to settle an income tax amount to £2,486.
Example 2 - When the adjusted total income is less than the finance costs,
In the year 2024/25, Mr Henry left his employment, making the property income his sole income source. However, the mortgage interest and the property business profits remain the same.
Again, let's translate these figures into numbers:
- Finance costs - £30,000
- Property business profits - £20,000
- Adjusted total income - £7,430 (20,000-12,570)
In this instance, the lower of the three figures is the Adjusted total income (£7,430). Therefore, the mortgage relief will be restricted to 20% of the adjusted total income. Here's how the income tax liability would change as a result of the change in the scenario:
Particulars | Amount (£) |
|---|---|
Employment income | 0 |
Property income | 20,000 |
Less: personal allowance | (12,570) |
Taxable Income | 7,430 |
Income tax liability (7,430@ 20%) | 1,486 |
Less: Mortgage interest tax relief (20% of £7,430) | (1,486) |
Income tax payable | Nil |
As a result of the reduction in Mr Henry's total income, his income tax liability, along with the mortgage interest tax relief, has fallen from our previous scenario.
It's crucial to understand that the Buy-to-Let mortgage interest tax relief applies exclusively to individual landlords and those in partnerships. The April 2025 abolition of the Furnished Holiday Letting (FHL) tax regime is now in effect, bringing former FHL landlords under Section 24 from the 2025/26 tax year meaning full mortgage interest deductions are now restricted to companies only. See the details below.
This may prompt consideration of incorporating your business. However, weighing several factors before making such a significant decision is essential. For instance, the transfer of property ownership to a company's name may incur Stamp Duty Land Tax (SDLT). Additionally, companies are subject to corporation tax, and the filing and payment requirements differ significantly from those for individuals.
For a more detailed analysis of the pros and cons of running a buy-to-let business as a company, read our article incorporating properties into a limited company.
Does the Restriction Only Apply to Higher Rate Taxpayers?
While the restriction does not affect the amount of tax paid by individuals in the basic rate tax band, it is incorrect to assume that it does not apply to them. The restriction will not result in additional tax because they pay tax at 20% on the rental profit before interest and receive a 20% credit for the interest paid, resulting in the same tax liability as before the restriction. However, the calculation method differs from the pre-restriction approach.
For instance, consider a landlord with a rental income of £40,000 and £10,000 in other allowable expenses. Since the landlord has no additional income, they fall into the basic rate tax bracket. Below is a comparison of the tax calculation before and after the restriction assuming that his mortgage interest is £5,000.
Pre-restriction approach | Post-acquisition approach | |
|---|---|---|
Rental Income | 40,000.00 | 40,000.00 |
Other expanses | -10,000.00 | -10,000.00 |
Mortgage interest | -5,000.00 | - |
Taxable income | 25,000.00 | 30,000.00 |
Income tax at 20% | 5,000.00 | 6,000.00 |
less: mortgage interest relief | - | -1,000.00 |
Income tax payable | 5,000.00 | 5,000.00 |
Therefore, even though the income tax payable is the same, the calculation does differ, as shown above.
Section 24 in 2025/26: FHL Abolition, MTD & The 2027 Rate Rise
The Section 24 restriction itself is unchanged for 2025/26 meaning individual residential landlords still receive a 20% basic-rate tax credit on finance costs. However, three developments have materially altered the landscape.
1. FHL Abolition: Holiday Let Landlords Now Under Section 24
From 6 April 2025, the Furnished Holiday Letting (FHL) tax regime was abolished. Properties previously exempt from Section 24 are now treated as standard residential lettings.
For former FHL landlords this means:
- Mortgage interest can no longer be deducted in full against rental income
- Only a 20% basic-rate Section 24 tax credit now applies - the same as any individual residential landlord
- Higher and additional-rate taxpayers who held FHLs have seen their effective relief fall from 40%/45% to 20% on the same interest costs
2. Making Tax Digital (MTD): Quarterly Reporting Begins
From 6 April 2026, MTD for Income Tax becomes mandatory for landlords with qualifying gross income above £50,000 in 2024/25. The rollout then extends:
- From 6 April 2027: those with income over £30,000 in 2025/26
- From 6 April 2028: those with income over £20,000 in 2026/27
Under MTD, quarterly summaries of income and expenses replace the annual Self Assessment return. Section 24 finance costs must be correctly tracked in MTD-compatible software throughout the year - not reconstructed at year-end.
3. Property Income Tax Rate Increase from April 2027
The Autumn Budget 2025 announced separate, higher tax rates on rental income from 6 April 2027 There is a 2 percentage point increase across every band. Basic-rate landlords will pay 22% instead of 20%, higher-rate landlords 42% instead of 40%, and additional-rate landlords 47% instead of 45%
The Section 24 tax credit rate rises to 22% in line with the new basic rate, but this modest adjustment does not offset the overall increase. For a higher-rate landlord with £60,000 in rental profit, the April 2027 change adds approximately £1,200 in tax per year. Combined with the threshold freeze extended to April 2031, more landlords will be pulled into higher brackets over time.
Note: Carrying Forward Unused Finance Costs
If the Section 24 tax credit is restricted in a given year because finance costs exceed property profits or adjusted income, the unused finance costs carry forward to the following year and are added to that year's finance costs for calculating the credit. Under MTD, tracking these carry forwards accurately from the outset is more important than ever.
Conclusion
Section 24 permanently changed how individual landlords are taxed on rental income - and the landscape around it keeps shifting. The 20% basic-rate tax credit is now the ceiling for finance cost relief for all individual residential landlords, including former FHL owners from April 2025.
With Making Tax Digital now in effect for landlords above the £50,000 income threshold, and a separate higher set of rental income tax rates arriving from April 2027, the cumulative pressure on leveraged landlords is only increasing. How much that matters for your specific portfolio depends on your income, your borrowing, and your structure - and the answer is rarely obvious without running the numbers.
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FAQs
Yes. If you are an individual receiving rental income from a UK residential property and paying mortgage interest, Section 24 applies regardless of how you came to own the property or how many properties you hold.
Yes. Because mortgage interest is no longer deducted before calculating taxable income, your reported profit is higher than your actual cash profit which, added to your other income, can push you into the 40% or 45% band, trigger the personal allowance taper above £100,000, or bring in the High-Income Child Benefit Charge above £60,000.
No. Section 24 only applies to individuals, partnerships and trusts. Limited companies can still deduct mortgage interest in full as a business expense though incorporating an existing portfolio triggers Capital Gains Tax and Stamp Duty Land Tax on the transfer, so it is not automatically the right answer. Weighing cost-benefit of incorporating with the specialist is recommended.
All residential property finance costs are restricted, not just mortgage interest. This includes loan interest, mortgage arrangement and broker fees, and overdraft interest on the property business. Allowable expenses such as letting agent fees, repairs, insurance, management costs remain fully deductible as before.
George Osborne announced it in the July 2015 Budget to level the playing field between buy-to-let landlords and first-time buyers, who could not deduct mortgage interest on their own homes. It remains in place under the current Labour government with no indication of reversal.
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