Most landlords know Section 24 exists. Very few understand how badly it hurts them. Before 2020, if your rental income was, say, £30,000 and your mortgage interest was £18,000, tax was on the £12,000 profit. Straightforward. That changed completely.
Under Section 24, introduced in the FA 2015, tax will be on the full rental income before deducting mortgage interest. Instead, you receive a 20% tax credit based on the finance costs. For a basic rate taxpayer whose income stays within the basic rate band, the outcome is broadly similar. For a higher rate taxpayer, the difference is enormous.
For example, you earn £50,000 from employment and £30,000 in rental income, with £18,000 in mortgage interest. Under the old rules, your rental profit was £12,000, taxed at 40%, giving £4,800 in tax.
Under Section 24, your taxable rental income is £30,000. That pushes your total income to £80,000, a sizeable part of which falls into the 40% band, giving a tax bill of £12,000, reduced by the 20% credit to £8,400, almost double what you paid before on the same property.
That credit not a simple 20% but the lowest of three figures: the finance costs, the property business profits for that year, and your adjusted total income above the personal allowance.
And it is about to get worse. From April 2027, property income tax rate goes up by 2%. The finance cost credit will also rise from 20% to 22%, a small concession that will not offset the rate increase for most landlords.
One thing most landlords miss is that the unused amounts carry forward indefinitely across your UK property business as a whole; so even if you sell one property you can still use the unused finance cost on that property in other existing or future properties.
There are no silver bullets or easy workarounds, but with proper planning the impact can be limited. One option is to estimate your profits and finance cost in advance and plan your property spends accordingly.