What changed
Before the change, a landlord letting residential property as an individual deducted mortgage interest as an expense, and paid tax on the profit that remained.
Section 24 of the Finance (No. 2) Act 2015 phased that out for residential lettings held personally. Mortgage interest is no longer deducted from rental income. Instead, tax is calculated on rental income before interest, and a tax credit at the basic rate is then applied against the bill.
For a landlord whose total income sits within the basic rate band, the outcome is broadly similar. For anyone taken into the higher rate, it is not.
Why it bites
The mechanism is what causes the problem. Because the full rent counts as income before interest is relieved, the rent inflates your taxable income for the purpose of working out which band you are in.
That has two consequences beyond the headline rate. A landlord whose employment income sits just below a threshold can be pushed above it by rental income that, after interest, produced very little actual profit. And because taxable income is higher, other things that key off it can be affected, including allowances and charges that taper as income rises.
The phrase people use is being taxed on income you never received. It is a fair description of the effect in a heavily mortgaged portfolio.
Who it affects most
- Higher and additional rate taxpayers. The credit is at the basic rate, so the gap is largest here.
- Highly geared portfolios. The more of your rent that goes on interest, the worse the effect.
- Landlords near a threshold. Where rental income tips you over, the marginal effect can be severe.
- Anyone who bought on interest only expecting interest to be fully deductible.
It affects a landlord with no mortgage not at all, and a basic rate taxpayer with a small mortgage very little.
The company question
Because the restriction applies to individuals rather than companies, incorporating became a widely discussed response. Companies pay corporation tax on profits after interest, so the Section 24 mechanism does not apply in the same way.
It is not a free move. Transferring existing property into a company is usually a disposal, with the tax consequences that follow, and there can be stamp duty on the transfer. Buy to let lending to companies is a different market with different rates. Taking money out of the company is itself taxable. And running a company brings filing obligations and costs every year.
For some portfolios it works well. For a single property it frequently does not. That calculation depends entirely on your numbers, and it is the clearest example on this site of something you should not decide from a blog post.
What you can still deduct
Section 24 restricted finance costs specifically. Ordinary running costs remain deductible against rental income, including:
- Letting agent fees, including management commission, set up and renewal charges.
- Repairs and maintenance, as distinct from improvements.
- Landlord insurance.
- Safety certificates, including gas and electrical inspections.
- Ground rent and service charges.
- Accountancy fees relating to the letting.
- Advertising for tenants.
Keep the records to support all of it. The distinction between a repair and an improvement matters, because an improvement is treated differently and generally is not deductible against rental income in the same way.
Where this stops being a website's job
This page explains the mechanism so you know what you are dealing with. It is not tax advice and should not be used as a substitute for it.
Tax rates, thresholds and reliefs change, sometimes annually, and the treatment of particular structures has moved more than once in recent years. Anything in this post that carries a number or a structure should be checked against the current position before you act on it.
If you own more than one property, are near a tax threshold, or are weighing incorporation, an accountant who works with landlords is worth several times their fee. The question to bring them is not how do I avoid Section 24, but what does my actual position look like across the next five years given my borrowing, my other income and my plans.
Common questions
Does Section 24 apply to limited companies?
No. The restriction applies to individuals letting residential property, not to companies, which is the main reason incorporation became a common topic. That does not make a company the right answer, because it brings its own costs and tax consequences.
Does it apply to furnished holiday lets?
The treatment of furnished holiday lets has changed in recent years and the favourable regime that once applied has been altered. Because this area has moved, check the current position with an accountant rather than relying on older guidance, including this page.
Can I avoid it by paying down the mortgage?
Reducing borrowing reduces the interest that is now only relievable at basic rate, so it does lessen the effect. Whether that is the best use of your capital is a financial question rather than a tax one, and the answer depends on your rates, your other options and your plans.
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