Section 24: why mortgage interest stopped being a deductible cost
Section 24 did not remove the cost. It removed the ability to deduct it, which is a different and more expensive thing.
Before the restriction was phased in from 2017, an individual landlord could deduct mortgage interest as a business expense, reducing taxable profit. Since April 2020 that deduction is gone for individuals, and it has been replaced by a basic-rate tax credit equal to 20% of the interest paid.
The practical effect is that a landlord paying higher or additional rate tax is taxed on profit they have already spent on interest, and then receives a credit worth much less than the tax they pay on it. For a higher-rate taxpayer, every pound of mortgage interest costs more than it used to, and the cost rises with the loan.
How the credit works in practice
You no longer reduce your taxable rental income by the interest. Instead you calculate tax on the full profit, then subtract a credit of 20% of the mortgage interest from the resulting tax bill. The credit cannot create a repayment — it can only reduce tax otherwise payable on the rental profit.
The consequence is a marginal rate effect that surprises people. Because the interest is added back to income, a landlord can be pushed over a tax threshold, into a higher band, or over the £50,000–£60,000 child benefit charge threshold by rental income that is entirely offset by interest payments they are making.
Why incorporation became popular, and why it is not automatic
A limited company can still deduct mortgage interest as an expense, and pays corporation tax on the profit, which is currently lower than the higher rates of income tax. For a higher-rate taxpayer with significant borrowing, the saving can be substantial.
It is not a simple decision. Transferring existing personally-held property into a company is a disposal for capital gains tax and attracts stamp duty, which frequently costs more than the saving. Companies cannot use the personal allowance, dividends carry their own tax, and buy-to-let mortgage rates for companies are often slightly higher. The calculation is specific to the portfolio, and it should be done with an accountant rather than from an article.
What it means for which property you buy
The restriction penalises debt, so it shifts the value of leverage. A highly-geared property that produced a useful cash return before 2017 may now produce none, while the same property bought with less borrowing or with cash performs very differently.
That is the reason unleveraged cash buying has become more attractive, and why the yield on the property — the return before financing — matters more than it did. If the net yield on the property is below your mortgage rate, leverage is costing you money, and no amount of tax planning changes that arithmetic.
Common questions
- Can I still deduct mortgage interest as a landlord?
- If you own the property personally, no — you receive a 20% tax credit on the interest instead of deducting it from rental income. If the property is owned by a limited company, the interest remains a deductible business expense against corporation tax. Furnished holiday lettings have their own regime, though that is also being reformed.
- Does Section 24 affect basic-rate taxpayers?
- It can, because the interest is added back to your income before the tax bands are applied. A landlord whose rental profit alone would keep them in the basic rate band can be pushed into higher rate by the add-back, even though the money went straight to the lender. The credit is then worth less than the extra tax.