Section 24 Explained: Impact on Landlords and How to Reduce Your UK Landlord Tax Bill

Restriction of Mortgage Interest Relief (Section 24): What Landlords Need to Know

Since the introduction of Section 24, many landlords have struggled to understand how mortgage interest relief now works and what practical options they have to reduce their tax exposure. The rules have reshaped the way property investors plan, structure, and report their rental income. This guide sets out the key points in plain language.

Understanding the implications of Section 24 is crucial for minimising your UK landlord tax obligations.

What Changed Under Section 24?

In the 2015 Summer Budget, the government announced a phased restriction on tax relief for mortgage interest and other finance costs for individual landlords (that is why some landlords are transferring property into a company due to mortgage interest restrictions). These rules now fully apply.

Before Section 24, landlords could deduct the full amount of mortgage interest from rental income when calculating taxable profit. Since the change, finance costs are no longer deducted in full. Instead, landlords receive a basic rate tax credit equal to 20% of those costs.

That means:

• Basic rate taxpayers still receive full relief in practice, but only if their total income stays within the basic rate band.

• Higher rate and additional rate taxpayers face a reduced level of relief and therefore higher tax bills.

This has become one of the most important issues for property investors when planning their tax position.

How Section 24 Works: A Simple Example

Consider the following figures:

• Rental income: £15,000

• Mortgage interest: £5,000

• Other costs: £2,000

• Net profit before Section 24: £8,000

Under Section 24 rules, the taxable profit is calculated as:

£15,000 rental income
minus £2,000 allowable costs
= £13,000 taxable profit

The £5,000 of mortgage interest is no longer deducted when computing profit. Instead, a tax reducer of 20% is applied to the interest (£1,000).

Here is how this affects different taxpayers:

Basic Rate Taxpayer
20% on £13,000 = £2,600
Less £1,000 tax credit
= £1,600 tax payable

Higher Rate Taxpayer
40% on £13,000 = £5,200
Less £1,000 tax credit
= £4,200 tax payable
(Equivalent to 52.5% on the true profit of £8,000)

Additional Rate Taxpayer
45% on £13,000 = £5,850
Less £1,000 tax credit
= £4,850 tax payable
(Equivalent to 60.625% on the true profit of £8,000)

The figures show the impact clearly: basic rate taxpayers remain largely unaffected, while higher and additional rate taxpayers face significant increases.

However, even basic rate taxpayers can be indirectly affected such as UK Landlord tax. Because taxable profits appear higher (£13,000 instead of £8,000), some individuals are pushed into higher rate tax bands, losing reliefs and allowances in the process.

What Can Landlords Do About Section 24?

Section 24 does not automatically mean every landlord should take action. The first step should always be a clear tax calculation. In some cases, the additional tax is small, and the cost of restructuring outweighs any benefit.

Once you understand the numbers, consider the following options.

1. Do Nothing

If the impact is minor, leaving your structure unchanged may be the most sensible approach. however you will not get the 100% mortgage interest relief. ie mortgage interest is not 100% tax deductible.

2. Sell Properties and Reinvest in a Limited Company

Some landlords choose to sell personally-held properties and reinvest through a limited company. This avoids Section 24 but triggers possible capital gains tax, higher purchase costs for the company, and additional compliance requirements.

3. Transfer Ownership to a Spouse or Civil Partner

Where one partner pays tax at a lower rate, transferring beneficial ownership can improve the overall tax outcome. Transfers between spouses are exempt from CGT under the no-gain/no-loss rule, but this must be planned correctly.

4. Transfer Properties to a Limited Company or LLP

This option is often discussed, but it is important to understand the implications clearly.

Key Considerations Before Moving Properties Into a Company

Finance and Mortgage Conditions

Many landlords are advised to use a declaration of trust to shift beneficial ownership to a company while keeping the mortgage in their personal name. This can breach mortgage conditions if done without lender consent.

Always contact your lender first. If an adviser tells you consent is not required, ask them to obtain written confirmation. Ultimately, your name is on the mortgage contract.

Capital Gains Tax

A transfer to a limited company is treated as a market-value sale for CGT. Even if you own the company, the transfer is still a disposal for tax purposes.

Stamp Duty Land Tax

The company will normally pay SDLT on the market value of the property being transferred. There are limited exceptions for partnerships, but these must be fully reviewed on a case-by-case basis.

Is a Limited Company Always Better?

Not always. Companies benefit from:

• Full deduction of mortgage interest

• Lower corporation tax rates (compared with higher-rate personal tax)

But they also involve:

• Higher mortgage costs

• Additional compliance (companies must file accounts and corporation tax returns)

• Dividend tax on profits extracted personally

• Costs of refinancing and legal restructuring

Each situation needs tailored advice. There is no universal answer.

Final Thoughts

Section 24 has changed the landscape for property investors, increasing tax bills for many and reshaping long-term strategy. The key is to understand your position clearly, run the numbers, and make decisions based on sound analysis rather than pressure or online myths.

If you are considering whether to restructure, transfer ownership, or move into a limited company model, take time to evaluate the tax position, financing implications, and long-term goals. The right approach depends entirely on your circumstances. Please give us a call or drop us an email info@theksma.co.uk and one of our staff shall be able to reach you out.