Mortgage Interest Relief: What's Left for Landlords?

# Mortgage Interest Relief: What''s Left for UK Landlords?

Section 24 of the Finance (No. 2) Act 2015 — phased in 2017–2020 — fundamentally changed buy-to-let economics. For individual landlords, mortgage interest is no longer deducted from rental income; instead, you get a basic-rate tax credit. The effect is biggest on higher-rate taxpayers.

How it works now (individuals)

1. Calculate rental profit ignoring mortgage interest.
2. Add this profit to your other taxable income.
3. Calculate income tax due in the normal way.
4. Subtract a tax credit = 20% × the lower of:

• Mortgage interest paid
• Rental profit
• Total income above personal allowance

The credit reduces your tax bill but does not reduce your taxable income.

Worked example — basic-rate vs higher-rate

Property: £15,000 rent, £8,000 mortgage interest, £2,000 other expenses.

Pre-2017 (old rules):

• Profit = £15,000 – £8,000 – £2,000 = £5,000.
• Basic-rate (20%) tax: £1,000.
• Higher-rate (40%) tax: £2,000.

Now (Section 24):

• "Profit" for tax = £15,000 – £2,000 = £13,000.
• Tax on £13,000 at 20% = £2,600; less 20% × £8,000 credit (£1,600) = £1,000 net (same as before).
• Tax on £13,000 at 40% = £5,200; less £1,600 credit = £3,600 net (£1,600 more than before).
• Tax on £13,000 at 45% = £5,850; less £1,600 credit = £4,250 net (£2,250 more).

The hidden penalty — band shift

Because mortgage interest no longer reduces taxable income, your higher rental "profit" can:

• Push you into the higher-rate (40%) band.
• Reduce your personal allowance (lost £1 for every £2 over £100,000).
• Trigger the High Income Child Benefit Charge.
• Restrict tax-free childcare and free hours.

The combined marginal rate for some landlords can approach 60% — even on a barely profitable rental.

Loss-making properties can still owe tax

In extreme cases, a property that loses money in cash terms can still produce a tax bill because the interest is no longer deductible from the "profit" figure.

Who still gets full relief

Limited companies

Mortgage interest remains fully deductible against company profits. Corporation tax is 19%–25%. This is the single biggest driver of higher-rate landlords incorporating.

Commercial property

Section 24 does not apply to commercial property — interest fully deductible.

Furnished Holiday Lets

Until April 2025, FHLs had favourable treatment including full interest deduction. The FHL regime was abolished from April 2025; FHLs now follow standard residential rules — no full deduction for individual owners.

Non-residential elements

Mixed-use property may allow apportioned deduction.

Mortgage products affected

• Buy-to-let mortgages (residential property).
• Bridging loans (residential security).
• Personal loans used to buy or fund a residential rental.
• Overdrafts if used for property purposes.

All count as "finance costs" for Section 24.

Structuring options

Limited company

Best for: higher-rate taxpayers, portfolio builders, intergenerational planning.

• Full interest deduction.
• Corporation tax 19–25%.
• Dividend extraction subject to dividend tax (8.75/33.75/39.35%).
• SDLT surcharge always applies.
• Higher mortgage rates and fees.

Spousal transfer

Transfer property to lower-earning spouse (or part-transfer with Form 17) — uses their basic-rate band fully.

Pension contributions

Reduce taxable income to stay below higher-rate threshold; preserves more of the basic-rate credit.

Pay down debt

Reduces interest exposure to Section 24 entirely. Often the best move for high-rate landlords approaching retirement.

Mortgage offset

If you have savings, an offset mortgage reduces interest paid — less impacted by Section 24 because there is simply less interest.

What does NOT save you

• Switching to interest-only does not change the Section 24 treatment.
• Remortgaging at a lower rate helps cash flow but not the Section 24 mechanism.
• Owning property in a partnership with non-tax-purpose entities does not avoid Section 24 for residential.

Worked planning example

A higher-rate taxpayer with £30,000 employed income and a BTL profit (pre-interest) of £20,000, interest £15,000:

• Total income for tax: £30,000 + £20,000 = £50,000.
• Income tax: ~£7,486.
• Less Section 24 credit: 20% × £15,000 = £3,000.
• Net tax: £4,486.

Same income through a company:

• Profit £5,000, Corporation tax 19% = £950.
• Dividend extraction £4,050 — basic dividend tax adds £197.
• Net tax: £1,147.

Difference: ~£3,300 per year. Over 10 years, £33,000 — easily justifying incorporation costs for a portfolio.

Common mistakes

• Treating mortgage capital repayments as deductible (only interest qualifies, and only at 20% credit).
• Forgetting that profit calculation now ignores interest — leading to under-budgeting for tax.
• Assuming the band-shift effect away.
• Not exploring company structure when in higher-rate band.
• Assuming FHLs still get full deduction (abolished April 2025).

Bottom line

For basic-rate landlords, Section 24 changed almost nothing. For higher-rate landlords it materially reduced after-tax returns and triggered the wave of incorporations. Calculate your tax under both structures before any portfolio expansion — the difference can fund the strategy itself.