Guide · 10 min read
The 2017-2020 phase-out of mortgage interest relief, the 20% basic-rate tax credit that replaced it, and how the change actually moves higher-rate landlord cash flow.
Written by Matt Lenzie · Published 19 May 2026
Advice from
Matt Lenzie · 25+ year career banker (Bank of Scotland, Lloyds Banking Group). £300m+ raised for property clients.
25+ year career banker (Bank of Scotland, Lloyds Banking Group). £300m+ raised for property clients.
Section 24 of the Finance (No.2) Act 2015 is the most significant tax change to UK buy-to-let in a generation. It changed the way rental income from personally-held BTL is taxed, and for higher-rate taxpayers, it changed the answer to "is this investment profitable" from yes to no on many cases.
The mechanism is technical but the impact is concrete. This guide walks through what the rule actually says, who it hits, with worked numbers, and what to do about it.
Before April 2017, personally-held BTL rental income was taxed cleanly: gross rent less all expenses (including mortgage interest) gave a taxable profit, which was added to the landlord's other income and taxed at their marginal rate.
On a leveraged BTL, typically £15,000 gross rent, £9,000 mortgage interest, £3,000 other costs, the personal taxable profit was £3,000. A higher-rate landlord paid 40% × £3,000 = £1,200 tax. Simple, and the maths worked.
Section 24 phased out the ability to deduct mortgage interest from rental income for personally-held BTL. From 2020/21 onwards, the full mechanism applies:
For basic-rate (20%) taxpayers, this nets to zero impact, the 20% they would have saved by deducting interest is exactly the 20% they now receive as a credit. Section 24 doesn't change their position.
For higher-rate (40%) and additional-rate (45%) taxpayers, it does change the position. They previously saved 40% or 45% on every pound of mortgage interest deducted; now they only receive a 20% credit. The shortfall is real cash.
Same numbers as before: £15,000 gross rent, £9,000 mortgage interest, £3,000 other costs. Borrower is a higher-rate (40%) taxpayer.
Pre-Section 24 (treatment removed from 2020/21):
Post-Section 24 (current treatment):
Same property, same actual cash flow, but the tax bill has gone from £1,200 to £3,000, an extra £1,800/year of tax. Actual cash position post-tax has dropped by £1,800/year compared to the pre-Section 24 world.
On this case the landlord's pre-tax cash flow is £15,000 rent − £9,000 interest − £3,000 costs = £3,000. After £3,000 tax, the landlord has £0 cash left. The property breaks even on cash but the landlord has paid £3,000 in tax against effective rental "profit" of £3,000.
Section 24 also creates a more subtle issue: by adding mortgage interest back into "rental income" for tax purposes, it pushes some landlords into higher tax bands they previously sat below.
A landlord earning £45,000 from employment (just below the higher-rate threshold of £50,270) with £15,000 of gross rent and £9,000 of mortgage interest used to have taxable rental profit of £3,000, total taxable income £48,000, all basic-rate.
Post-Section 24, the same landlord has £12,000 of "rental income" added to their £45,000 salary, total taxable income £57,000, which pushes them into higher rate. The mortgage interest credit only refunds at 20%, not 40%. Effective tax bill significantly higher.
This is the "stealth" effect of Section 24, it doesn't just penalise existing higher-rate landlords; it can move basic-rate landlords into the higher-rate band.
Same numbers as before, but borrower is basic-rate (20%) taxpayer (with employment income low enough that the rental income doesn't push them above £50,270).
Pre-Section 24:
Post-Section 24:
Same outcome. Section 24 mechanically nets to zero for landlords who stay basic-rate.
The full impact of Section 24 lands on:
The hardest-hit profile is a 45% additional-rate taxpayer with leveraged BTL, every £1,000 of mortgage interest costs them £450 of marginal tax saving but only refunds £200 via the credit. £250 of additional tax per £1,000 of interest, every year.
Landlords not impacted by Section 24:
If you're a higher-rate personal-name BTL landlord and Section 24 is eating your cash flow, four options are realistically open:
1. Share the income with a basic-rate spouse or civil partner. Transfers between spouses are no-gain/no-loss for CGT and free of stamp duty. By transferring (or jointly holding) the property with a basic-rate spouse, more of the rental income falls within their lower band. Limits: only useful where the spouse genuinely has spare basic-rate band and isn't herself pushed above it by the additional rental income.
2. Incorporate into a limited company. Move the BTL into an SPV. Inside the company, mortgage interest is fully deductible, Section 24 doesn't apply. The cost is real: CGT on the disposal from personal to company, stamp duty on the company's purchase, and possible early redemption charges on the existing mortgage. For some larger portfolios, Section 162 incorporation relief can defer the CGT. Specialist tax advice essential before committing.
3. Reduce the mortgage. Section 24 only bites on mortgage interest. Paying down the BTL mortgage from cash, lump sum, or a remortgage at lower LTV reduces the impact. For some retired or near-retired landlords with cash sitting in low-yield savings, paying down BTL mortgages is the most tax-efficient way to deploy that cash.
4. Sell the property. If the after-tax cash flow doesn't work and the property doesn't make sense in any other structure, sometimes the right answer is to crystallise the equity, pay the CGT, and redeploy elsewhere, into an SPV, an unencumbered BTL, or out of property entirely.
Section 24 has now been fully in force for five complete tax years. The market has adjusted: limited-company SPV is now the default structure for new BTL purchases by higher-rate landlords, the lender pool has caught up with strong SPV product competition, and the residual personal-name market is increasingly basic-rate landlords for whom the rule doesn't bite.
If you're starting a BTL portfolio in 2026 and you're already a higher-rate taxpayer (or will be after rental income is added on), the answer is almost always to start in an SPV. Migration later carries cost.
If you're already holding personal-name BTL as a higher-rate taxpayer and feeling the squeeze, you have four options listed above, none simple, all worth modelling carefully. Book a 15-minute call to walk through your specific position; we model both the property finance side and the tax-band consequence on every case.
For the broader product comparison see our Limited company SPV vs personal name BTL guide.
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