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  • Buy-to-Let Mortgages

08 May 26

6 min read

Section 24 Tax Relief: What Landlords Need to Know in 2026

Section 24 — the restriction on mortgage interest tax relief for individual residential landlords — is now fully embedded in the tax landscape. The phased introduction that began in 2017 completed in 2020, and 2026 is the seventh year in which landlords have been operating under the full regime. If you have not yet modelled the impact on your portfolio, or restructured in response to it, this article sets out what you need to know.

1

What Section 24 actually does

Before Section 24, landlords could deduct mortgage interest from rental income before calculating tax liability. A landlord receiving £20,000 in rent and paying £12,000 in mortgage interest was taxed on £8,000 of profit — a meaningful reduction in tax due.

Under Section 24, mortgage interest is no longer a deductible expense. Instead, landlords receive a basic rate (20%) tax credit on the lower of their finance costs, rental profits, or total income. For a basic rate taxpayer, the outcome is broadly neutral. For higher and additional rate taxpayers, the effect is substantial — you pay income tax on the full rental income and receive only a 20% credit, rather than deducting interest at your marginal rate.

2

The cash flow problem

The most damaging effect of Section 24 is that it can create a tax liability on a property that is actually generating negative cash flow. If your rental income is £18,000, your mortgage interest is £16,000, and your other costs are £4,000, you are losing £2,000 per year in cash terms — but under Section 24, your taxable rental income is £18,000 (minus the £4,000 non-interest costs = £14,000), offset by a 20% credit on the £16,000 interest (£3,200). A higher-rate taxpayer in this scenario pays 40% of £14,000 (£5,600) minus the £3,200 credit = £2,400 in tax on a property losing £2,000 per year.

This scenario is more common than landlords expect, particularly in the South East where yields are lower and mortgage balances higher relative to income.

3

The limited company route

Limited companies are not subject to Section 24. Within a company structure, mortgage interest remains fully deductible against rental profits, and the resulting profit is subject to corporation tax rather than income tax. For higher and additional rate taxpayers with significant portfolio mortgage debt, the tax saving from incorporating can be substantial.

The decision to incorporate is not straightforward, however. Transferring personally held properties to a company triggers SDLT on the transfer at current market value (there is no CGT holdover relief for residential property), and CGT may also be payable on any gain since purchase. For many landlords, the annual tax saving is outweighed by the upfront incorporation cost — only those with long investment horizons or those starting a new portfolio structure benefit clearly.

4

Strategies short of incorporation

Not every landlord should incorporate, and several strategies can reduce the Section 24 impact within personal ownership. Paying down mortgage debt reduces interest costs, which reduces the Section 24 impact — particularly relevant if you have surplus capital or are receiving inheritance or other windfalls.

Holding mortgaged property in a lower-earning spouse’s name — where they are a basic rate taxpayer — removes the higher-rate Section 24 penalty, since the restriction is broadly neutral at the basic rate. Pension contributions can also reduce adjusted net income below the higher-rate threshold in some cases, reducing the effective tax rate on rental profits. Each of these strategies requires individual modelling alongside a tax adviser.
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