Tax rules can significantly affect profits from property investment, even when rental properties generate a regular income. One important rule for individual landlords is the Section 24 Mortgage Interest Restriction. It changes how tax relief is calculated for landlords who rent out residential properties with mortgage loans. Before this rule, landlords could generally deduct qualifying mortgage interest as a rental expense when calculating taxable rental income. Under the current rules, individual landlords generally cannot deduct residential property finance costs directly from rental income. Instead, they may qualify for a basic-rate tax reduction, subject to specific rules and limitations. This guide explains how Section 24 works, who it affects, how the tax reduction is calculated, and how landlords can manage their tax bills. It also explains how accurate record-keeping and professional accounting advice can help you meet HMRC requirements.
What Is the Section 24 Mortgage Interest Restriction?
Section 24 was introduced through the Finance (No. 2) Act 2015 and changed the tax relief available to individual landlords for residential property finance costs. The restriction was phased in from the 2017/18 tax year and fully implemented by the 2020/21 tax year. Since then, affected individual landlords have generally received a basic-rate tax reduction instead of deducting qualifying mortgage interest directly from their rental income. In simple terms, you may have to pay tax on your rental profit before accounting for mortgage interest, even when your interest payments significantly reduce the cash you have left. These rules primarily apply to individual landlords letting residential property. Different rules may apply to limited companies, commercial properties, and other ownership arrangements.
Why Can Section 24 Increase Your Tax Bill?
Section 24 can increase a landlord’s tax bill because taxable rental profit may be higher than the actual cash profit remaining after mortgage interest payments. It can also affect your overall Income Tax position. Although a substantial proportion of your rental income may go towards mortgage interest, the taxable income calculated under Section 24 could push you into a higher tax band in some circumstances. For this reason, landlords should consider rental income, allowable expenses, other income, mortgage costs, and their overall tax position together.
Who Is Affected by Section 24?
Section 24 primarily affects individual landlords who receive rental income from residential properties and pay qualifying mortgage interest or other finance costs.
It may affect:
- Individuals who personally own buy-to-let properties.
- Landlords with several mortgaged rental properties.
- Higher-rate and additional-rate taxpayers who receive rental income alongside other income.
- Landlords whose taxable income increases because mortgage interest is not deducted directly.
- Individuals who jointly own rental properties.
The exact impact depends on the landlord’s circumstances, income, property ownership, and qualifying finance costs.
What About Landlords Who Own Property Through Limited Companies?
Companies that own residential investment properties generally calculate taxable profits under Corporation Tax rules. Eligible interest expenses may be deductible, subject to applicable restrictions, including corporate interest restriction rules where relevant. However, buying property through a limited company is not automatically more tax-efficient. Corporation Tax, dividend tax, mortgage terms, ongoing ownership costs, and the tax consequences of selling or transferring property must all be considered. Before changing an ownership structure, landlords should seek professional advice. Transferring a personally owned property into a company may trigger tax and legal costs, potentially including Capital Gains Tax and Stamp Duty Land Tax.
Does Section 24 Apply to Commercial Property?
Section 24 generally concerns finance costs associated with individual landlords’ residential property businesses. Different rules may apply to commercial property and other property uses. If you own a shop, office, warehouse, or mixed-use property, check the tax rules relevant to your particular circumstances.
Which Mortgage Expenses Qualify for Tax Relief?
Interest on loans used to acquire, improve, or otherwise finance a residential rental property may qualify as a finance cost, provided the relevant HMRC conditions are met. Qualifying finance costs may also include certain incidental borrowing costs and alternative finance costs. However, mortgage capital repayments do not qualify as deductible rental expenses or finance costs for the Section 24 tax reduction. Landlords should distinguish between mortgage interest and capital repayments when reviewing their mortgage statements.
Maintain accurate records of:
- Mortgage interest statements.
- Loan agreements and relevant finance charges.
- Rental income received.
- Property repair and maintenance costs.
- Allowable expenses, including letting agent fees.
- Ownership percentages for jointly owned properties.
Accurate records help landlords calculate rental income correctly and support their figures if HMRC requests further information.
What Expenses Can Landlords Still Claim?
Section 24 does not remove all deductions available to landlords. Qualifying revenue expenses can generally still be deducted when calculating rental profits, provided they meet HMRC’s requirements.
Examples may include:
- Letting agent and property management fees.
- Property insurance premiums.
- Qualifying maintenance and repair costs.
- Ground rent and service charges, where applicable.
- Certain legal and professional fees.
- Advertising costs associated with finding tenants.
Each expense must be assessed according to the relevant tax rules.
Repairs Versus Property Improvements
Repairs generally restore a property to its previous condition without substantially improving it. For example, repairing a damaged roof or replacing a broken window may qualify as a revenue expense. Improvements that add something new or substantially upgrade a property may be treated differently. Such costs may be capital expenditure and could have different tax implications. Landlords should keep invoices and records describing the work carried out. This makes it easier to distinguish repairs from capital improvements and apply the correct tax treatment.
How Landlords Can Manage the Impact of Section 24
Although individual landlords generally cannot deduct qualifying residential mortgage interest directly from rental income, they can take practical steps to manage their finances and understand their tax position.
1. Review Your Rental Property Profitability
Calculate rental income, allowable expenses, mortgage interest, maintenance costs, and potential tax liabilities for each property. Do not assess a property’s performance based on rental income alone. A property may generate positive cash flow but deliver a much smaller profit after tax.
2. Maintain Accurate Bookkeeping Records
Keep records of rental payments, repairs, fees, insurance, and finance costs throughout the year. Compare your records with bank statements and mortgage documentation. Good bookkeeping reduces the risk of missing allowable deductions or reporting incorrect figures. It also makes preparing your Self Assessment tax return easier and more reliable.
3. Review Rental Income and Property Expenses
Consider whether your current expenses are reasonable in relation to rental income and market conditions. Any increase in rent should comply with the tenancy agreement and applicable legal requirements. Regularly reviewing expenses can also help you identify unnecessary costs and understand your property’s financial performance.
4. Understand Your Income Tax Position
Your salary, self-employment profits, pension income, and rental income can all affect your overall tax position. Section 24 may also influence your eligibility for certain tax allowances or benefits. For example, your Personal Allowance may be reduced if your adjusted net income exceeds the relevant threshold. Understanding your total income can help you anticipate your tax liability and plan your finances more effectively.
5. Consider Property Ownership Structures Carefully
Some landlords consider using a limited company to hold future property investments. However, the tax treatment can differ from personal ownership, and additional reporting requirements and taxes may apply when profits are withdrawn. Compare all relevant costs and tax implications before making a decision. Professional advice can help you assess which structure is suitable for your circumstances.
6. Prepare Your Tax Return Early
Do not wait until the filing deadline to collect your rental records. Preparing early gives you time to verify mortgage interest, ownership percentages, allowable expenses, and any missing documentation. If you need help understanding your figures, an accountant can explain how the relevant tax rules apply to your situation.
Self Assessment Tax Returns and Section 24
Landlords who receive taxable rental income must report it to HMRC according to the applicable requirements. Whether you need to submit a Self Assessment tax return depends on your personal circumstances and the rules for the relevant tax year. Your tax return should accurately reflect your rental income and allowable expenses. You must also calculate any qualifying finance cost tax reduction according to the applicable HMRC rules. These calculations can become more complicated if you jointly own property, have multiple rental properties, receive employment income, or pay tax at different rates.
How to Maximise Your Allowable Deductions on a Self Assessment Tax Return
Landlords can improve the accuracy of their tax returns by maintaining complete records, claiming eligible property expenses, distinguishing repairs from improvements, and checking mortgage interest figures carefully. Remember that Section 24 restricts the direct deduction of qualifying residential mortgage interest for affected individual landlords. Good record-keeping helps you claim legitimate deductions without incorrectly treating mortgage interest as an allowable rental expense.
Self Assessment Tax Return Requirements in the UK
You may need to submit a Self Assessment tax return if your rental income meets HMRC’s reporting requirements. You may also need to file a return because you are self-employed or have other income or circumstances that require one. Check the requirements for the relevant tax year to determine whether registration and filing are necessary.
Common Section 24 Mistakes to Avoid
Understanding the difference between rental profit, cash flow, and taxable income can help landlords avoid common Section 24 errors.
Incorrectly Deducting Mortgage Interest
Do not deduct qualifying residential mortgage interest directly from rental income when the Section 24 restriction applies. Instead, calculate any available tax reduction according to the relevant rules.
Treating Mortgage Capital Repayments as Expenses
Mortgage capital repayments are not allowable rental expenses. Keep them separate from mortgage interest when reviewing your financial records.
Overlooking Allowable Repairs and Management Fees
Failing to record eligible repair costs, letting agent fees, or other qualifying expenses may result in an inaccurate calculation of taxable rental profit.
Misclassifying Improvements as Repairs
Capital improvements may receive different tax treatment from repairs. Record the work undertaken and check the applicable rules before claiming a deduction.
Recording Incorrect Ownership Percentages
For jointly owned properties, ensure that income, expenses, and ownership shares are reported correctly according to the applicable tax rules.
Overestimating the Finance Cost Tax Reduction
The tax reduction is subject to statutory limits and eligibility conditions. It is not necessarily equal to 20% of all mortgage interest payments.
Missing Self Assessment Deadlines
Missing registration, filing, or payment deadlines may lead to penalties or interest. Keep track of relevant dates and prepare your records in advance. Always retain supporting documentation and calculations before submitting your tax return. If you discover an error in a previously filed return, consult the relevant HMRC guidance about correcting it.
How City Gate Accountants Can Help Landlords
Section 24 can make tax calculations more complicated, particularly for landlords with multiple rental properties or additional sources of income. City Gate Accountants provides accountancy and tax services. Landlords can review the firm’s website to confirm which services are available and whether they meet their specific requirements. Professional accounting support may help landlords organise property records, review allowable expenses, understand how finance cost tax relief affects their calculations, and prepare Self Assessment tax returns.
The right advice depends on your property ownership, mortgage arrangements, other income, and financial plans. No single approach is suitable for every landlord. Landlords looking for local professional assistance may also consider Chartered Accountants in East London. Similarly, anyone searching for Chartered Certified Accountants in Wembley should check the firm’s qualifications, relevant experience, and available services before choosing an accountant.
Conclusion
The Section 24 Mortgage Interest Restriction remains an important consideration for individual landlords who own residential rental properties. It changes how mortgage interest affects taxable rental profits and can increase the tax liability of some landlords. You can manage its impact by maintaining accurate records, claiming eligible expenses, reviewing property profitability, and checking your Self Assessment calculations carefully. Landlords should also understand the differences between personal and company ownership before making structural changes to their property investments. If you are unsure how Section 24 affects your rental properties, City Gate Accountants may be able to assist with your accounting and tax requirements.
FAQs
1. What Is the Section 24 Mortgage Interest Restriction?
Section 24 restricts the ability of individual landlords to deduct qualifying residential mortgage interest directly from rental income when calculating taxable profits. Instead, eligible landlords may receive a basic-rate tax reduction, subject to the applicable rules and limits.
2. Can Landlords Still Claim Mortgage Interest as a Tax Deduction?
Individual landlords affected by Section 24 generally cannot deduct qualifying residential mortgage interest directly from rental income. Instead, they may qualify for a tax reduction based on eligible finance costs.
3. Does Section 24 Apply to Limited Companies?
Generally, Section 24 does not apply to property businesses conducted by limited companies in the same way it applies to individual landlords. Companies calculate taxable profits under Corporation Tax rules, although interest deductions may be subject to other restrictions.
4. Can Landlords Claim Property Repairs Under Section 24?
Yes. Qualifying revenue repairs can generally be deducted when calculating rental profits. Improvements and certain replacement costs may receive different tax treatment.
5. How Does Section 24 Tax Relief Work?
Eligible individual landlords may receive a basic-rate tax reduction for qualifying residential property finance costs, subject to statutory restrictions. The reduction is not necessarily equal to 20% of all mortgage interest payments because eligibility and calculation limits apply.
6. Can Section 24 Push a Landlord Into a Higher Tax Band?
Yes. Because qualifying mortgage interest is not deducted directly from rental income when calculating taxable property profits, a landlord’s taxable income may be higher than their cash profit. This can affect their Income Tax position.
7. Should Landlords Transfer Their Properties to a Limited Company?
Not necessarily. A limited company may receive different tax treatment for interest expenses, but Corporation Tax, dividend tax, mortgage costs, legal expenses, and property transfer taxes must also be considered. Seek professional advice before changing your ownership structure.