Mortgage Interest Tax Relief: The Complete Guide

Section 24 means you no longer deduct mortgage interest from rent for income tax. You pay tax on an inflated "profit" and then get a 20% credit on the interest instead.

"This guide provides general information about UK landlord tax obligations. It is not financial or legal advice. Tax treatment depends on your individual circumstances and may change. Consider consulting a qualified accountant or solicitor for advice specific to your situation."

1. How mortgage interest relief actually works now

Legal basis:

Finance (No.2) Act 2015 s24 inserts ITTOIA 2005 ss272A, 274A-274C and ITA 2007 s274A-274B to cap finance cost relief at the basic rate for individuals.

For individual landlords (including partners):

• You calculate property profit with no deduction for most residential finance costs.
• Instead you get a basic-rate tax reduction equal to 20% of the lower of:
• Your finance costs for the year that were not deducted from profits.
• Your property business profits for the year (after non-finance expenses and brought-forward losses).
• Your adjusted total income above the personal allowance (excluding savings and dividends).

So relief is capped at 20%, and it can be restricted further if profits are low or your other income is low.

For companies:

• Section 24 does not apply.
• Under CTA 2009, companies simply deduct full finance costs (interest, related fees) as normal expenses before Corporation Tax.

That difference is why the same mortgage looks fine in a company and brutal in your own name.

2. What counts as "finance costs"

HMRC and most guidance include as restricted finance costs for residential property:

• Mortgage interest on BTL loans.
• Interest on loans used to buy or improve the property.
• Overdraft interest on accounts used for the property business.
• Mortgage arrangement fees and similar finance charges (often treated as interest over the term).
• Interest on loans for furnishings (where not already treated as capital).

These are precisely the items that used to be fully deductible against rent and now only attract a 20% reducer.

3. Worked examples: basic, higher, additional rate

Use the common example many tax sites use:

• Rent: GBP 15,000.
• Mortgage interest: GBP 5,000.
• Other expenses: GBP 2,000.
• "Real" profit = 15,000 - 5,000 - 2,000 = GBP 8,000.

Under Section 24, taxable profit = 15,000 - 2,000 = GBP 13,000. Finance costs eligible for credit = GBP 5,000 (assuming the lower-of tests do not restrict).

Basic-rate taxpayer (20%)

• Tax before credit: 13,000 x 20% = GBP 2,600.
• Basic-rate reduction: 20% x 5,000 = GBP 1,000.
• Final tax: GBP 1,600.

That is exactly 20% of the real GBP 8,000 profit, the same as the old system. For pure basic-rate, Section 24 often makes no difference to the final tax, provided the gross "profit before interest" does not push you into higher rate.

Higher-rate taxpayer (40%)

• Tax before credit: 13,000 x 40% = GBP 5,200.
• 20% reducer: GBP 1,000.
• Final tax: GBP 4,200.

Effective tax on real GBP 8,000 profit: 4,200 / 8,000 = 52.5%. Under the old rules it would have been 8,000 x 40% = GBP 3,200, so you are paying GBP 1,000 extra for exactly the same economics.

Additional-rate taxpayer (45%)

• Tax before credit: 13,000 x 45% = GBP 5,850.
• 20% reducer: GBP 1,000.
• Final tax: GBP 4,850.

Effective tax rate on GBP 8,000 profit: approx 60.6%. Old system: 8,000 x 45% = GBP 3,600. You are GBP 1,250 worse off.

That is the phantom profit effect: you are taxed on GBP 13,000 you never really keep, because GBP 5,000 of it already went to the lender.

4. How Section 24 interacts with other income, HICBC, and personal allowance

Because interest is not deducted when calculating taxable property profit, Section 24 inflates the income figure that drives:

• Your move from basic to higher rate.
• The Child Benefit High Income Charge (HICBC).
• The personal allowance taper.

Total income

HMRC stack your salary, rental profit (before interest) and other income together. If that combined figure crosses GBP 50,000/60,000/100,000, various extra charges apply.

HICBC

• Child Benefit begins to be clawed back once adjusted net income exceeds GBP 60,000 (threshold increased from GBP 50,000 from April 2024).
• Because Section 24 inflates your rental profit in that "adjusted net income" calculation, it can push you into HICBC or increase the charge even though your real cash profit has not changed.

Personal allowance taper

• Personal allowance (GBP 12,570) is withdrawn by GBP 1 for every GBP 2 of income above GBP 100,000.
• Section 24 makes it easier for you to cross GBP 100k because mortgage interest no longer reduces your property profit in that income figure.

So even for "basic-rate" landlords on paper, an interest heavy BTL can be the thing that tips you into:

• 40% band.
• Losing Child Benefit.
• Losing personal allowance.

The 20% credit cannot undo those band jumps.

5. Planning options (and their limits)

Realistic levers, all with trade-offs:

Incorporate future purchases

• Buy new properties in a company where interest is fully deductible.
• You avoid Section 24 on those units but still suffer it on legacy stock unless you transfer (with CGT/SDLT consequences).

Consider incorporation of an existing portfolio

• Full-fat move into a company can make sense for high-rate, high-LTV, multi-property landlords over a long horizon.
• You must factor in CGT on the transfer (18/24%), SDLT with the 5% surcharge, remortgage costs, and ongoing company admin. It is not free and only pays off over years.

De-leverage

• Paying down mortgages reduces finance costs and therefore how much income is "phantom" in the first place.
• That shrinks both your effective tax rate and your exposure to band creep and HICBC.

Offset and flexible mortgages

• Parking surplus cash in offset accounts can reduce the interest you actually pay (and thus the scale of the Section 24 problem) while keeping flexibility.
• You still only get 20% relief on whatever interest remains.

Restructure ownership between spouses

• Shift more rental income to a lower-rate spouse (Form 17 and beneficial ownership) to keep more of the property profit in basic rate where Section 24's effect is minimal.

None of this is magic; every route needs a spreadsheet with your numbers.

6. What forums get wrong about mortgage interest relief

Recurring myths:

"You cannot claim mortgage interest at all now." Wrong: you do get relief, but as a 20% tax reduction instead of a deduction. The cash effect is very different for higher-rate taxpayers, but interest has not been totally removed.

"Basic-rate landlords are completely unaffected, end of story." Only if your total income stays in basic rate after adding the inflated rental profit. Once the Section 24 "phantom profit" pushes you into higher rate or HICBC, you are affected even if your underlying salary has not changed.

"The 20% credit applies to all interest you pay." It is 20% of the lower of finance costs, property profit, and adjusted total income above the allowance. Losses or low income can cap the amount you actually get to offset.

"Incorporating always fixes Section 24." Section 24 does not apply in a company, but incorporation can trigger big one-off CGT and SDLT bills and ongoing Corporation Tax and extraction tax. It is a restructuring tool, not a free fix.

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