Section 24 Landlord Mortgage Interest 2026: 20% Credit

If you're a landlord renting out residential property in the UK, Section 24 has fundamentally changed how mortgage interest affects your tax bill. Since April 2020, you can no longer deduct mortgage interest as an expense when calculating your taxable rental profit. Instead, you receive a basic-rate (20%) tax credit after your tax bill is worked out. This change hits higher-rate (40%) and additional-rate (45%) taxpayers hardest, because they effectively pay tax on rental income they never actually receive—income that goes straight to the mortgage lender. In this guide, we'll explain exactly how Section 24 works in 2026-27, show you real examples of the impact, and walk through the main strategies landlords use to reduce the damage.

What is Section 24?

Section 24 refers to provisions in the Finance (No. 2) Act 2015 that restrict tax relief on finance costs for residential property landlords. Before this law, if you earned £20,000 in rent and paid £8,000 in mortgage interest, you'd only pay tax on £12,000 of profit. Simple.

From 6 April 2020 onwards, that's no longer allowed. Now you pay tax on the full £20,000, then claim back a basic-rate tax credit (20% of the £8,000 interest = £1,600). If you're a higher-rate taxpayer, you've lost out significantly: you used to save 40% on that £8,000 (£3,200), but now you only get back £1,600.

The restriction applies to:

Residential property lettings (houses, flats, student accommodation let as homes)
Mortgage interest and other finance costs (loan interest, arrangement fees, early repayment charges)
Individual landlords and partnerships (not limited companies)

It does not apply to:

Commercial property (offices, shops, warehouses—full interest deduction continues)
Furnished holiday lets (FHL) that meet the qualifying criteria (full deduction still available)
Property held in a limited company (companies deduct interest as a normal business expense)

How the restriction works in practice

The old system (pre-2020)

Let's say you're a higher-rate taxpayer:

Rental income: £25,000
Allowable expenses (repairs, insurance, agent fees): £3,000
Mortgage interest: £10,000

Old calculation:

Rental income: £25,000
Less expenses: £3,000
Less mortgage interest: £10,000
Taxable profit: £12,000
Tax at 40%: £4,800

The new system (2020 onwards, including 2026-27)

Same numbers:

New calculation:

Rental income: £25,000
Less expenses (but NOT mortgage interest): £3,000
Taxable profit: £22,000
Tax at 40%: £8,800
Less basic-rate tax credit (20% × £10,000): £2,000
Net tax due: £6,800

You're now paying £2,000 more in tax on exactly the same economic profit. That's a 42% increase in your tax bill.

Example: Sarah, a higher-rate landlord

Sarah is a teacher earning £55,000 from her job. She also owns a buy-to-let flat:

Rental income: £18,000
Mortgage interest: £9,000
Other expenses: £2,000
Real economic profit: £7,000

Her 2026-27 tax position:

Employment income puts her in the higher-rate band (anything over £50,270 in 2026-27).

Her rental profit for tax purposes is £18,000 – £2,000 = £16,000. This is added to her employment income, so she pays 40% on most of it: £6,400 tax on rental profit.

She then gets a tax credit of 20% × £9,000 = £1,800.

Net rental tax: £6,400 – £1,800 = £4,600.

She's paying £4,600 tax on a real profit of £7,000. Her effective tax rate on actual profit is 66%. Before Section 24, she'd have paid 40% on £7,000 = £2,800. The reform has cost her £1,800 extra per year.

The hidden trap: losing your Personal Allowance

Section 24 creates a nasty side-effect. Because mortgage interest is no longer deducted from rental income, your total taxable income appears higher. If this pushes you over £100,000, you start losing your Personal Allowance (£12,570 in 2026-27). You lose £1 of allowance for every £2 over £100,000, creating an effective 60% tax rate on income between £100,000 and £125,140.

Example: James, caught in the Personal Allowance trap

James earns £85,000 from his job. His rental property generates:

Rental income: £30,000
Mortgage interest: £18,000
Other expenses: £2,000
Real profit: £10,000

His taxable income:

Employment: £85,000
Rental profit (for tax): £30,000 – £2,000 = £28,000
Total: £113,000

Because he's over £100,000, he loses Personal Allowance:

Excess: £113,000 – £100,000 = £13,000
PA lost: £13,000 ÷ 2 = £6,500
Remaining PA: £12,570 – £6,500 = £6,070

The £13,000 that caused the PA loss is taxed at an effective 60% (40% income tax + 20% from losing the allowance). That's £7,800 on just that slice.

His mortgage interest credit is 20% × £18,000 = £3,600.

Before Section 24, his rental income would have been £10,000 taxable, keeping him at £95,000 total—well clear of the PA trap. Section 24 has pushed him into a brutal tax position on paper income he never actually received.

Strategies to reduce Section 24 impact

1. Transfer property to a limited company

This is the most common workaround. Limited companies are not affected by Section 24—they deduct mortgage interest as a normal business expense and pay Corporation Tax on the actual profit.

How it works:

Company rental income: £25,000
Less all expenses including mortgage interest: £13,000
Taxable profit: £12,000
Corporation Tax at 25% (for profits over £50,000; 19% for profits under £50,000 in 2026-27): £3,000 (assuming 25%)

You then extract profit via salary or dividends, which have their own tax implications. But the company has only paid tax on real profit.

The catch:

Stamp Duty Land Tax: transferring property to a company triggers SDLT (3% surcharge applies)
Capital Gains Tax: the transfer is a disposal at market value; you may owe CGT
Mortgage issues: many lenders charge higher rates for limited company mortgages, or won't lend at all
Complexity: company accounts, Corporation Tax returns, confirmation statements—more admin and accountancy fees

This strategy works best if:

You're buying new properties (put them straight into a company)
You have significant equity and can remortgage
Your rental profits are substantial enough to justify the setup costs
You plan to hold properties long-term

2. Transfer property to a spouse or civil partner

Transfers between spouses/civil partners are tax-neutral (no CGT or SDLT on a genuine gift). If your spouse is a basic-rate taxpayer and you're higher-rate, transferring property to them means:

They pay 20% tax on rental profit
The 20% mortgage interest credit fully covers their tax rate
Net effect: no extra tax from Section 24

Example:

You earn £60,000; your spouse earns £20,000. You transfer a rental property generating £15,000 profit (after mortgage interest).

If you kept it: you'd pay 40% tax on the inflated profit, minus 20% credit—painful.

If your spouse owns it: they pay 20% on the profit, get 20% credit back—they break even on the mortgage interest element.

Considerations:

You must genuinely give up ownership and control
If you later separate, the property is legally theirs
Their total income must stay within basic-rate band (under £50,270 in 2026-27)

3. Joint ownership

If full transfer feels too risky, consider joint ownership. You can split rental income (and the tax credit) according to actual ownership shares. If you own 50/50 with a basic-rate spouse, half the pain disappears.

You can even elect for an unequal split if you own as "tenants in common" with unequal shares (not available for "joint tenants"). File form 17 with HMRC to declare the actual ownership split.

4. Focus on capital growth, not income

Some landlords have shifted strategy: accept lower rental yields, focus on properties likely to appreciate. Pay the tax hit now, benefit from capital growth later (CGT is often lower than income tax, and you control timing).

5. Furnished Holiday Lets (FHL)

If your property qualifies as a Furnished Holiday Let under HMRC rules, Section 24 doesn't apply—you still get full mortgage interest deduction.

FHL qualifying criteria (2026-27):

Let commercially for at least 210 days per year
Actually let for at least 105 days (not counting long-term lets over 31 days)
No single let exceeds 31 continuous days for more than 155 days in the year

FHLs are treated as a trade for tax purposes. But be warned: the government has announced plans to abolish FHL tax advantages from April 2025 [this was announced in 2024 Budget; confirm current status]. If that goes ahead, this loophole closes.

6. Pay down mortgage debt

Less mortgage interest = less Section 24 pain. If you have cash reserves, paying down buy-to-let mortgages reduces the interest you pay, shrinking the gap between the old relief (40%) and new credit (20%).

Of course, this ties up capital and reduces leverage. It's a defensive move, not a growth strategy.

Commercial property: the exception

Section 24 only affects residential lettings. If you let commercial property (offices, retail units, industrial warehouses), you still deduct mortgage interest in full as a business expense.

Some landlords have pivoted to commercial property for this reason, though commercial property comes with different risks (longer void periods, business tenant failures, different lending criteria).

Common mistakes

Mistake 1: Forgetting the tax credit Some landlords see the higher tax bill and panic, forgetting they'll get the 20% credit. Always calculate the net position.

Mistake 2: Assuming incorporation is always better Limited companies have advantages, but SDLT and CGT on transfer can be brutal. Run the numbers over 5-10 years, including all transaction costs, before jumping.

Mistake 3: Not considering the Personal Allowance trap If you're near £100,000 total income, even a small rental profit can trigger PA loss. Model your total income carefully.

Mistake 4: Ignoring your spouse's tax position If your spouse is a basic-rate taxpayer, joint or transferred ownership can save thousands. Don't let pride or control issues cost you money.

Mistake 5: Claiming the credit incorrectly The tax credit is capped at the lower of:

20% of your finance costs, or
20% of your rental profits (before finance costs), or
Your total income tax liability

If your rental profit is small or you have little other income, you might not get the full credit. HMRC's system should handle this, but check your tax calculation.

Mistake 6: Thinking you can avoid it Section 24 is law. There's no "opt out." You must apply it to residential lettings. Ignoring it means underpaying tax and facing penalties.

What about future changes?

As of 2026-27, Section 24 is fully embedded. There's no sign of repeal or softening from any major political party. The government sees it as a permanent feature, designed to level the playing field between landlords and homebuyers (the argument being that homeowners can't deduct mortgage interest, so why should landlords?).

Some landlords have exited the market entirely. Others have adapted. The key is understanding your own numbers and choosing the strategy that fits your circumstances.

What to do next

If you're a landlord affected by Section 24, your next steps are:

Calculate your actual position: use the examples above to work out how much extra tax you're paying. Don't guess—use real numbers from your last tax return.
Model the alternatives: would incorporation save you money after all costs? Would transferring to a spouse work? Use a spreadsheet or get professional help.
Talk to a specialist: Section 24 planning is complex. A wrong move (like incorporating without considering SDLT) can cost you tens of thousands.

AI Tax can help in two ways:

Quick questions: if you want to understand how Section 24 applies to your specific situation, or explore one of the strategies above, chat with AI Tax for instant, plain-English answers tailored to your numbers.
Full service: if you need someone to handle your Self Assessment, model incorporation, or manage the whole tax side of your property business, AI Accountant offers end-to-end support—filing, planning, and strategy, all in one place.

Section 24 isn't going away, but with the right approach, you can significantly reduce its impact. The worst thing you can do is nothing—because every year you delay, you're paying more tax than you need to.

Section 24 + Landlord Mortgage Interest (2026)