Section 24 of the Finance (No.2) Act 2015 removed the right of individual landlords to deduct mortgage interest as a business expense. Since April 2020, landlords can only claim a 20% Income Tax credit on their mortgage interest costs. This has significantly increased the tax burden for higher-rate taxpayers who own mortgaged rental properties.

How it worked before April 2020

Previously, landlords deducted mortgage interest directly from rental income to calculate their taxable profit. For a higher-rate taxpayer:

  • Rental income: £15,000
  • Mortgage interest: £10,000
  • Taxable profit: £5,000
  • Tax at 40%: £2,000

How it works now (from April 2020)

Mortgage interest is no longer deducted from rental income. Instead, landlords receive a basic rate (20%) tax credit on the interest amount. For the same higher-rate taxpayer:

  • Rental income: £15,000
  • No deduction for interest
  • Taxable profit: £15,000
  • Tax at 40%: £6,000
  • Less 20% credit on £10,000 interest: £2,000
  • Tax payable: £4,000

The same landlord now pays £4,000 instead of £2,000, an increase of £2,000 per year solely due to Section 24.

The "phantom income" problem

For some heavily mortgaged landlords, Section 24 means they are taxed on rental income even when making a cash loss. The gross rent is taxable but the interest that absorbs most of it is no longer deductible. This has made some properties financially unviable.

Who is most affected?

  • Higher-rate (40%) and additional-rate (45%) taxpayers
  • Landlords with high loan-to-value (LTV) mortgages
  • Landlords with low yields relative to their mortgage costs
  • Basic-rate taxpayers are broadly unaffected (the 20% credit equals the old 20% deduction rate)

Strategies to mitigate the impact

  • Incorporation: Limited companies can still deduct mortgage interest in full as a business expense. However, moving properties into a company triggers CGT and SDLT on the transfer, which must be modelled carefully.
  • Reduce mortgage balance: Overpaying mortgages reduces the interest amount subject to the restriction.
  • Jointly owned properties: Transferring a share to a lower-rate taxpaying spouse can reduce the effective rate, though the transfer itself may trigger CGT.
  • Portfolio review: Some properties may no longer make financial sense to hold and should be sold.

See our guide on whether landlords should incorporate for a full analysis of the pros and cons of moving to a limited company.

Disclaimer

This guide is for general information only. Property taxation is complex and frequently changes. Always consult a qualified tax adviser or accountant before making decisions. Find one via our accountant directory.