When Section 24 of the Finance (No. 2) Act 2015 was introduced, the reaction from landlords ranged from disbelief to fury. The change, which was phased in between 2017 and 2020 and is now fully in effect, fundamentally altered the tax treatment of residential buy-to-let property for individual landlords. It did not affect companies.
The core of it is this: previously, landlords could deduct their mortgage interest costs from their rental income before calculating their taxable profit. Section 24 replaced that deduction with a basic rate tax credit — currently 20% of the mortgage interest paid. For basic rate taxpayers the impact is limited. For higher and additional rate taxpayers, the change is significant, and in some cases it means paying tax on a profit the landlord never actually made.
What Section 24 actually does — with numbers
The easiest way to understand the impact is through a simple example. Suppose a landlord receives £18,000 in annual rent and pays £12,000 in mortgage interest. Under the old rules, the taxable profit would be £6,000. At 40% tax that's a £2,400 bill.
Under Section 24, the landlord pays tax on the full £18,000 of rental income — then receives a 20% tax credit on the £12,000 of mortgage interest, which is £2,400. So at 40% tax the bill is £7,200, minus the £2,400 credit — a net tax liability of £4,800.
Same property. Same rent. Same mortgage. Tax bill doubled. And that's before factoring in that the £18,000 of rental income — now counted in full — may push the landlord into a higher tax band, or cause them to lose their personal allowance if their total income approaches £100,000.
Section 24 doesn't just increase the tax rate. In some cases it creates a situation where a landlord pays tax on income that — after mortgage costs — they never actually received. That's not a technicality. It's a real cash flow problem.
Who is most affected
The impact depends almost entirely on two things: your tax band and your loan-to-value ratio. High-rate taxpayers with heavily mortgaged properties are hit hardest. Basic rate taxpayers with modest borrowing feel it much less — for them, the 20% credit roughly replaces the deduction they used to get at 20%.
The change is particularly punishing for landlords who expanded their portfolios using leverage — borrowing against existing properties to fund new purchases. That model, which was entirely rational and tax-efficient under the old rules, now generates significantly higher tax bills on the same income. Some landlords in this position are now running properties at an effective loss after tax, despite collecting rent that looks positive on paper.
There's also a stealth effect on personal allowances. Because rental income now flows into the tax calculation in full before the mortgage interest credit is applied, it can artificially inflate a landlord's "adjusted net income" — the figure HMRC uses to determine whether the personal allowance tapers. Landlords who would previously have sat comfortably below the £100,000 threshold may now find themselves losing £1 of personal allowance for every £2 of rental income above it.
The options available to landlords
There is no single solution that works for everyone. The right approach depends on the size and structure of the portfolio, the landlord's other income, their borrowing levels, and their longer-term intentions. But there are several legitimate routes worth understanding.
Incorporation — moving into a limited company
Section 24 applies to individual landlords, not companies. A limited company can still deduct mortgage interest as a business expense in full, and corporation tax (currently 25% for profits above £250,000, with marginal relief below) is generally lower than the higher rates of income tax. This is why many new buy-to-let investors now purchase through a company structure from the start.
However, incorporating an existing portfolio is rarely straightforward. Transferring properties from personal ownership to a company triggers stamp duty land tax and — unless incorporation relief applies — capital gains tax on any uplift in value. Incorporation relief can potentially defer the CGT, but it requires the rental activity to qualify as a business rather than passive investment, which depends on the scale and management of the portfolio. This is an area where proper advice is essential before taking any action.
Reducing the mortgage
If the tax hit is being driven primarily by high levels of borrowing, reducing the mortgage reduces the interest cost and therefore the impact of Section 24. This might mean overpaying the mortgage, selling a property and using the proceeds to pay down debt on others, or simply not remortgaging to the maximum available loan. None of these are exciting options, but they are effective at reducing the exposure.
Accelerating depreciation and allowable deductions
Section 24 affects mortgage interest specifically. Other legitimate deductions — repairs and maintenance, letting agent fees, insurance, professional fees, the cost of replacing furnishings — remain fully deductible from rental income in the normal way. Making sure all allowable expenses are properly claimed is basic, but it's worth a thorough review to ensure nothing is being missed, particularly around repairs versus capital expenditure.
Pension contributions as a planning tool
For landlords affected by the personal allowance taper — where rental income pushes adjusted net income above £100,000 — pension contributions can be a meaningful planning tool. Pension contributions reduce adjusted net income, which can restore some or all of the personal allowance. The tax relief on the contribution, combined with the allowance restoration, can make the effective rate of relief considerably higher than the headline pension contribution relief rate.
The incorporation question — a longer view
For landlords building a portfolio from scratch, the case for a company structure is generally strong. For those with existing personally-held properties, it's more complicated. Incorporation might make excellent long-term sense economically but create a significant upfront tax cost that takes years to recover. Whether that cost is worthwhile depends on the size of the portfolio, the expected future growth, and the landlord's timeline.
What's worth avoiding is making the decision based on a single factor — whether that's minimising this year's tax bill or following what others in the market are doing. The interaction between stamp duty, CGT, corporation tax, income tax on dividends extracted from the company, and inheritance tax planning is complex enough that it genuinely warrants a full financial model rather than a rough calculation.
If you have a residential property portfolio and you haven't reviewed your structure since Section 24 came into full effect, now is a sensible time to do so. The earlier you act, the more options remain available to you.
