What Is Section 24 and How Does It Affect Landlords?

Which section 24 are we talking about?

This is Section 24 of the Finance (No. 2) Act 2015, the finance cost restriction. It has nothing to do with possession, tenancy law or the Renters’ Rights Act 2025.

The section 24s landlords mix up

Section 24 of the Landlord and Tenant Act 1954 governs continuing business tenancies, and Section 24 of the Matrimonial Causes Act 1973 deals with property transfers on divorce. Neither has anything to do with your tax bill.

The tax rule is Section 24 of the Finance (No. 2) Act 2015, which inserted sections 272A and 272B into the Income Tax (Trading and Other Income) Act 2005. No form is filed and no notice is served: it changes the arithmetic on your Self Assessment return and nothing else.

What changed on 6 april 2017

Before that date you deducted every penny of mortgage interest from rental income as a business expense. Relief came at your own marginal rate, so a 40% taxpayer got 40p back on each pound of interest.

Section 24 removed the deduction in four annual steps and replaced it with a flat 20% reduction applied to your tax bill. The final step landed in April 2020.

How does the 20% tax reducer work?

You add the mortgage interest back into your taxable property profit, work out the income tax on that inflated figure, then subtract 20% of the lowest of three separate amounts.

The four steps hmrc uses

• Work out your property profit with no deduction at all for finance costs.
• Add that profit to your other income and calculate the tax in the normal way.
• Take 20% of the lowest of your finance costs, your property profits and your adjusted total income.
• Subtract that amount from the tax you owe for the year.

The reducer cuts your tax bill, not your income. That single difference drives everything below.

The three caps on the reducer

HMRC’s Property Income Manual sets the reduction at 20% of the lowest of three amounts. Most landlords assume they get 20% of the interest, and plenty do not.

• Finance costs: this year’s restricted interest plus anything carried forward from earlier years.
• Property business profits: your profits for the year after any brought-forward property losses.
• Adjusted total income: net income from all sources, less savings income, dividend income and your personal allowance.

Adjusted total income is the cap that catches people out. A landlord whose only income is the rent, sitting close to the personal allowance, can end up with a reducer worth far less than 20% of the interest actually paid.

What happens to relief you cannot use

Unused finance costs are not lost: anything the caps block is carried forward and added into step one of next year’s calculation. That helps a landlord whose profits recover, and does nothing for one who stays loss-making.

Why does your tax bill rise when your profit has not?

Because the figure HMRC uses to set your tax band is now rent minus running costs, with the mortgage interest left in. That inflated number decides your band, your personal allowance and several benefit thresholds before the 20% reducer is applied.

Phantom profit and the higher rate band

Take a landlord on a £40,000 salary with £18,000 of rent, £9,000 of mortgage interest and £3,000 of other costs. Under the old rules the property added £6,000 to their income and everything stayed inside the basic rate band.

Under Section 24 it adds £15,000 instead, pushing £4,730 of income past the £50,270 higher rate threshold. That slice is taxed at 40% rather than 20%, an extra £946 on a profit that never moved.

Thresholds are frozen until 2031/32, so this gets worse every year that rents rise. The current bands and the personal allowance are published on gov.uk.

Losing the personal allowance at £100,000

The personal allowance falls by £1 for every £2 of adjusted net income above £100,000 and disappears at £125,140. Mortgage interest sitting inside that figure pushes you up the taper faster than your real profit warrants.

Between those two points the effective marginal rate is 60%. A landlord paying £30,000 of interest can be dragged into that band on a real profit that would never have got them near it before 2017.

The child benefit charge nobody expects

The High Income Child Benefit Charge starts once the higher earner’s adjusted net income passes £60,000 and claws the whole payment back by £80,000. Section 24 lifts that figure without putting a penny more in your pocket.

For two children the full clawback is worth roughly £2,300 a year. Landlords with young families are often hit hardest by a rule that looks like a higher rate problem.

What does section 24 cost a basic rate and a higher rate landlord?

On the same £18,000 rental property, a basic rate landlord pays no extra tax while a higher rate landlord pays £1,800 more. The second one hands over 70% of a real profit of £6,000.

Two landlords, one property

Both own the same flat. Both collect £18,000 in rent, pay £9,000 in mortgage interest and £3,000 in other allowable costs, leaving a real profit of £6,000.

The only difference is the income behind it: a £30,000 salary for the first and £60,000 for the second. Both columns use 2026/27 rates, and the £3,000 of running costs includes landlord insurance at a typical £250 a year.

Why the basic rate column is not safe either

The first landlord escapes only because £45,000 of phantom profit still fits inside the basic rate band. Move that salary to £40,000 and the £946 band-drag charge from the previous section applies.

Section 24 is a threshold rule rather than a bracket rule. Every rent rise, pay rise and interest rate rise moves you closer to the line.

Which costs count as finance costs?

Interest on borrowing taken out for the residential part of your property business, anything economically equivalent to interest, and the incidental costs of arranging that finance. Every other expense on your schedule is still deducted in full.

What gets restricted

• Interest on a buy-to-let mortgage secured against a let dwelling.
• Interest on a personal loan or further advance used to buy or improve a let dwelling.
• Arrangement, broker and valuation fees charged for arranging that borrowing.
• Alternative finance returns paid under a Sharia-compliant facility.

The test is the purpose of the borrowing rather than the asset securing it. A loan across a mixed portfolio is split on a just and reasonable basis, so the interest attached to a commercial property share stays fully deductible.

What stays fully deductible

Capital repayments were never deductible and get no reducer either, which is why interest-only borrowing behaves differently from a repayment mortgage here.

• Landlord buildings insurance premiums, deducted in full against rental income.
• Buy-to-let insurance on a standard single let, typically £150 to £400 a year.
• Rent guarantee and legal expenses cover, where the policy relates to the letting business.
• Letting agent fees, ground rent, service charges, repairs and safety certificates.

The deductions that survived matter more than they did in 2016. Our guide to what landlord insurance covers sets out which sections of a policy are allowable.

Who is affected and who is not?

Every individual letting residential property is caught, including through a partnership or a trust. Companies, commercial lettings and the non-residential share of a mixed loan sit outside it.

The full picture

Joint owners are restricted on their own share, which is why one spouse can be badly hit while the other is barely touched. Shifting the beneficial split between spouses is a common response and needs advice before anything is signed.

Holiday lets lost their exemption in april 2025

Furnished holiday lets used to sit outside the restriction completely. HMRC’s manual confirms the regime was repealed for income tax and capital gains tax from 6 April 2025, and for corporation tax from 1 April 2025.

A holiday let held in your own name is now restricted like any other residential let. That has rewritten the numbers for coastal and city-break landlords, most of whom bought on the old basis and still need short-term let cover on top.

Where the restriction bites hardest

Highly geared property suffers most, so HMO landlords and anyone who bought at 75% loan to value in the last few years feel it first. A strong yield does not protect you when the interest bill is large.

Mortgaged flats are caught in exactly the same way as houses, even where the freeholder insures the structure through a block of flats policy. The service charge stays deductible, the mortgage interest does not.

What can landlords do about it, and what does each move cost?

Four responses genuinely change the tax: incorporating, buying future property through a company, cutting the debt and selling. Each carries a bill of its own, and for most landlords the bill arrives years before the saving does.

Incorporating a portfolio you already own

Moving a property you already own into a company is both a disposal and a purchase. The company pays stamp duty land tax on market value including the 5% additional property surcharge, and you may face capital gains tax at 24% on the way out.

On a £250,000 property that is £12,500 of surcharge on top of £2,500 of standard duty. Add legal fees, a valuation and a remortgage onto company products that price 0.5 to 1 percentage point above personal buy-to-let rates.

Incorporation relief and partnership treatment can strip out some of that cost, but only where the lettings are genuinely run as a business. A company landlord also needs the policy written in the company name, plus public liability cover for a limited company once anyone is employed or engaged.

Buying the next one through a company

New purchases inside a company avoid the transfer costs entirely and keep full interest deductibility. Corporation tax runs at 19% up to £50,000 of profit and 25% above £250,000, with marginal relief between.

The catch is getting the money out, because dividends and salary are taxed again in your hands. A company wins clearly where profits stay in the business and fund the next deposit.

Cutting the debt, selling or raising the rent

Cutting the loan is the only response with no tax consequence attached, and landlords running several properties normally clear the highest-rate loan first. Selling crystallises a gain against a £3,000 exempt amount, and an empty property on the market needs unoccupied property cover once the void passes 30 to 45 days.

Rent rises are the weakest lever, and hardest of all where the tenant relies on housing benefit and a DSS landlord policy. Portfolio landlords with four or more mortgaged properties have the most to model, and loss of rent cover matters more when the tax assumes rent you might not collect.

What happens to section 24 from april 2027?

Rental income gets its own income tax rates two percentage points above the standard ones from April 2027, and the reducer is set to rise with them. Nothing changes for the 2026/27 return you file next January.

The new property income rates

The Autumn Budget 2025 confirmed rates of 22%, 42% and 47% on property income from April 2027, against 20%, 40% and 45% today. Thresholds stay frozen to 2031/32.

The reducer tracks the basic rate applying to property income, so it is expected to move to 22% on the same date. None of it is in force yet, and 2026/27 still runs on 20%.

What to do before it lands

Model your 2027/28 position now rather than in the spring of 2028. The landlords who get caught are the ones whose phantom profit already sits a few thousand pounds under a threshold.

Nothing is being repealed and no relief is coming back. Plan on the basis that the restriction is permanent and the rate on rental profit is rising.