Section 24 mortgage interest restriction, explained

“Section 24” is shorthand for the rule introduced by Finance (No. 2) Act 2015 that ended the deductibility of residential mortgage interest for individual landlords. It was phased in from 2017/18 to 2020/21 and has been fully in force ever since. If you let property in your own name and have a mortgage, this is the single biggest tax difference between you and a landlord operating through a Ltd company.

The rule, in one paragraph

For residential property held in an individual’s name, finance costs (mortgage interest, mortgage arrangement fees, interest on loans taken out for the property, etc.) are no longer deductible from rental profits. Instead, you receive a tax reducer equal to 20% of the finance costs, applied against your tax liability. The result: your rental profit figure on the return is higher than it used to be, but you get a flat-rate basic-rate credit against the tax due on that profit.

Source: ITTOIA 2005 s272A (restriction); s274A (the basic-rate reducer); PIM2058.

Why this matters more for higher-rate taxpayers

Under the old rules, a higher-rate landlord effectively got 40% relief on mortgage interest (because it reduced taxable profits at 40%). Under Section 24, the relief is fixed at 20% — basic rate. A higher-rate landlord has lost half their mortgage-interest relief.

For a basic-rate landlord, the cash effect is similar to the old rules — 20% relief, just delivered as a credit rather than a deduction. But the higher reported profit can have second-order effects: it can push you into the higher-rate band, reduce your personal allowance (above £100,000), affect Child Benefit High Income Charge, or affect tax credits / Universal Credit assessments.

A worked example

A landlord with one BTL property:

• Rent received: £24,000
• Allowable expenses (excluding mortgage interest): £3,500
• Mortgage interest: £10,000
• The landlord also has a £55,000 PAYE salary.

Old rules (pre-2017/18) — for comparison

• Property profit: £24,000 − £3,500 − £10,000 = £10,500
• Tax on £10,500 at higher rate (40%): £4,200

Section 24 rules (today)

• Property profit (mortgage interest no longer deductible): £24,000 − £3,500 = £20,500
• Tax on £20,500 at higher rate (40%): £8,200
• Less basic-rate finance-cost reducer: 20% × £10,000 = −£2,000
• Net tax on rental income: £6,200

So the change costs this landlord £2,000 a year in extra tax compared with the old rules — exactly the 20% of mortgage interest they used to be able to deduct at the higher rate but now can’t.

The reducer is capped at three things

The 20% reducer doesn’t always apply to the full finance cost. The credit is the lower of:

1. 20% of total finance costs for the year;
2. 20% of the property profits;
3. 20% of adjusted total income (your total income above the personal allowance, excluding savings and dividend income).

In practice this only matters if your rental losses are large or your overall taxable income is unusually low. For most landlords the first cap (the actual finance-cost figure) is the binding one.

Source: ITTOIA 2005 s274A; PIM2054.

Carry forward of unrelieved finance costs

If the relief is restricted in a particular year because of one of the caps above, the unrelieved finance costs can be carried forward to be used against the same property business in future years. They don’t expire and they don’t shift to a different income stream.

What this means for MTD ITSA

Under MTD ITSA, you submit quarterly summaries of income and expenses through the year, and a Final Declaration after the year-end. The Section 24 adjustment is made at the Final Declaration stage, not in the quarterly updates. So your quarterly figures will show mortgage interest as an outgoing of the property business, but the actual income-tax credit calculation happens once a year, alongside everything else that pulls in non-property income.

This is one of the easier places for landlords doing MTD by hand to get figures wrong — the quarterly submissions can look right while the year-end calculation is several hundred pounds off, and you don’t notice until the Final Declaration. Software that knows the rule and applies the cap correctly is the practical fix.

Section 24 doesn’t apply to:

• Furnished holiday lets (where the FHL rules apply — the FHL regime was abolished from 6 April 2025, so former FHLs are now on the same Section 24 footing as ordinary residential lets).
• Commercial property letting — finance costs on commercial lets remain fully deductible.
• Property held in a Ltd company — corporate landlords deduct finance costs against corporation-tax profits in full. This is the structural reason many landlords have considered incorporating since 2017.

Should I incorporate?

A common reaction to Section 24 is to consider transferring existing rental properties into a Ltd company. The honest answer is: often less attractive than it looks at first. The transfer crystallises Capital Gains Tax on the gain to date, may trigger Stamp Duty Land Tax (with surcharges), and only fixes forward — the historic CGT and SDLT cost can wipe out years of Section 24 savings. There’s also extra annual cost (corporation tax filings, additional accountant fees) and BTL mortgage rates for Ltd companies are typically higher.

Whether incorporation works for you depends on the size of your portfolio, your other income, your time horizon, and whether you can use the “incorporation relief” rules (which generally need a genuine property business, not a passive holding). This is firmly a get personal advice question — speak to a tax adviser before doing anything.