In April 2020, the final phase of Section 24 landed. Overnight, the way UK residential landlords calculated their tax bill changed forever. Mortgage interest — once the largest deductible expense for leveraged landlords — was stripped out of the profit equation and replaced with a flat 20% tax credit. For higher-rate taxpayers, this was a body blow. For basic-rate taxpayers with large mortgages, it created a cruel illusion: they were still "basic rate" on paper, but the "phantom profit" pushed them into the 40% band.

1. What Is Section 24?

Section 24 of the Finance (No. 2) Act 2015 restricts tax relief on finance costs (mortgage interest, interest on loans to buy furnishings, and fees) for residential properties let by individual landlords. It does not apply to commercial property, furnished holiday lettings, or properties owned by limited companies.

The change was phased in between 2017 and 2020:

• 2017/18: 75% of interest deductible, 25% replaced by 20% credit
• 2018/19: 50% deductible, 50% credit
• 2019/20: 25% deductible, 75% credit
• 2020/21 onwards: 0% deductible, 100% credit

Since April 2020, landlords receive a tax reduction equal to 20% of their mortgage interest, applied as a credit against their final tax bill. The interest itself is no longer subtracted from rental income before tax is calculated.

2. Before vs. After: The Numbers

Let's look at a typical leveraged landlord: £20,000 annual rent, £8,000 in other expenses, £6,000 mortgage interest, and £45,000 salary from employment.

In the first table row, the net tax looks identical. But look at the final row: because the £6,000 of mortgage interest is now treated as "profit," the landlord's total income crosses the £50,270 Higher Rate threshold. That extra £6,000 is taxed at 40%, not 20%. The 20% credit only refunds £1,200, leaving a £1,200 net loss compared to the old system.

3. The "Phantom Profit" Trap

We call it phantom profit because it exists only on HMRC's spreadsheet, not in your bank account. You still pay the mortgage interest to your lender. You just can't deduct it anymore.

Here's how the mechanics work in 2026/27:

1. You collect £20,000 in rent.
2. You pay £8,000 in repairs, agents, insurance.
3. You pay £6,000 in mortgage interest.
4. Your cash profit is £6,000.
5. But HMRC says your taxable profit is £12,000.
6. If you earn £45,000 in salary, your total income is £57,000.
7. The £6,000 above £50,270 is taxed at 40% = £2,400.
8. You get a 20% credit on the £6,000 interest = £1,200 back.
9. Net extra tax: £1,200 — on money you never kept.

This is why landlords with 60–75% loan-to-value mortgages saw their effective tax rates jump by 10–15 percentage points after 2020, even when rents and interest rates stayed flat.

4. Who Was Hit Hardest?

Section 24 is not neutral. It discriminates based on leverage, tax bracket, and ownership structure.

Higher-Rate Taxpayers with High Leverage

If you were already a 40% taxpayer, the removal of interest relief was a straight 20% tax hike on your financed returns. A landlord with £50,000 rent and £30,000 mortgage interest went from deducting that £30k to receiving only a £6,000 credit. At 40% marginal rate, the lost relief costs £6,000 per year in extra tax.

Basic-Rate Taxpayers Near the Threshold

The most insidious group. A teacher earning £45,000 with a modest buy-to-let suddenly finds themselves a "higher-rate taxpayer" on paper. They lose Child Benefit, face higher dividend tax, and lose the £1,000 Personal Savings Allowance — all because of phantom profit.

Leveraged Landlords in the South East

High property prices mean high mortgage balances. A £400,000 property at 60% LTV carries £240,000 of debt. At 4% interest, that's £9,600 of non-deductible interest — nearly £2,000 of lost tax relief per year for a higher-rate taxpayer.

Who Escaped?

• Cash buyers: No mortgage interest = no change.
• Commercial landlords: Section 24 does not apply to commercial property.
• Furnished holiday lettings: Still treated as a trading business with full interest relief.
• Limited companies: Corporate ownership sidesteps Section 24 entirely.

5. Mitigation Strategies

Since 2015, landlords have tried various tactics to soften the blow. Some work. Some create bigger problems than they solve.

Strategy 1: Increase Rents

The simplest response — pass the cost to tenants. Between 2016 and 2024, average UK rents rose 28% (ONS data), partly driven by landlord cost pressures. But rent ceilings exist: tenant affordability, local housing allowance caps, and competition from other landlords. You cannot raise rents indefinitely.

Strategy 2: Cut Costs Aggressively

Self-managing instead of using agents, shopping insurance annually, and claiming every allowable expense helps. But the biggest cost — mortgage interest — is fixed by your lender. Cost-cutting only offsets a fraction of the Section 24 hit.

Strategy 3: Transfer to a Lower-Earning Spouse

If your spouse is a basic-rate or non-taxpayer, transferring ownership can halve the tax bill. Transfers between married couples are CGT-free. However:

• You lose sole control of the asset.
• If you divorce, the property is a matrimonial asset regardless of whose name is on the deed.
• Your spouse's estate planning and IHT position changes.

Strategy 4: Remortgage to Lower Rates

Reducing your interest bill directly reduces the Section 24 damage. A 1% rate reduction on a £200,000 interest-only mortgage saves £2,000/year in interest — and £400–£800 in lost tax relief, depending on your bracket. In the 2024–2026 rate environment, this has been the most practical short-term fix for many landlords.

6. Should You Use a Limited Company?

The most popular structural response to Section 24 has been the SPV (Special Purpose Vehicle) limited company. Companies pay 25% Corporation Tax (2026/27 rate) on profits, but they can deduct mortgage interest in full. For higher-rate taxpayers, this is attractive.

But company ownership has its own tax traps:

• Mortgage rates: BTL company mortgages typically carry 0.5–1.5% higher interest rates.
• Extracting profits: Salary triggers PAYE + NICs. Dividends are taxed at 8.75% (basic) or 33.75% (higher). To match personal ownership, you must leave profits in the company or extract slowly.
• Stamp Duty: Transferring an existing property into a company triggers SDLT + 3% surcharge.
• Capital Gains Tax: Transferring triggers CGT on the current market value, even though you haven't sold.
• Admin costs: Annual accounts, corporation tax returns, Companies House fees — roughly £800–£1,500/year.

7. Calculate Your Real Profit

Generic yield calculators still deduct mortgage interest from profit. They are wrong for UK residential landlords. Our Buy-to-Let Tax & Yield Calculator applies Section 24 correctly:

• Mortgage interest is not subtracted from rental income
• You receive a 20% tax credit instead
• Your total income (salary + rental profit) is used to determine your tax band
• Net yield is calculated after all tax, not before

8. Frequently Asked Questions