Section 24 Mortgage Interest Relief


Simon Misiewicz

15th February 2019

Article relevant to the tax year 2020/21

What is Section 24 mortgage interest relief? The new tax rules

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.

HMRC in all its wisdom will say that the mortgage interest that you pay on your property portfolio will be treated as zero cost. Therefore, the higher geared your property portfolio, the greater income you will be deemed to have received.

Pre 2017/18 property investors were allowed to offset 100% of the mortgage costs against their property income. From 2017/18 the amount of mortgage interest that will be allowed to be offset against property income will be reduced to 75%. There will be a further reduction of 25% each year until 2020/21 when no allowance will be made to offset mortgage interest against property income in order to calculate the tax due.

Optimise - Section 24 mortgage interest relief cap

In place of mortgage interest being a tax-deductible cost will be a 20% tax reducer. This tax reducer is calculated as 20% of the lessor of

  • Mortgage interest costs
  • Property profit (clearly excluding mortgage interest as a cost)
  • Taxable income as a whole

The tax reducer will start at 25% for the tax year 2017/18. This will increase by 25% until 2020/21 when the 20% tax reducer will be set at 100% of the above values.

As you can see HMRC are replacing the mortgage interest cost allowance with the mortgage tax reducer.

Section 24 mortgage interest relief example

John is an employee earning £50,000 and had the following income/costs for property in 2016/17

  • £50,000 rental income
  • (£20,000) mortgage interest cost
  • £30,000 property profit
  • £12,000 buy to let tax liability (as a higher rate taxpayer paying 40% tax = £30,000 x 40%)

In 2017/18 the situation will be:

  • £50,000 rental income
  • (£15,000) mortgage interest cost (reduced from £20,000)
  • £35,000 profit
  • £14,000 buy to let tax liability (as a higher rate taxpayer paying 40% tax = £35,000 x 40%)

The £14,000 is reduced by the tax reducer as follows:

25% of the 20% tax reducer rate is 5%. The 5% tax reducer rate is the lower of

  • £35,000 property profit
  • £15,000 mortgage interest
  • £85,000 taxable income

Therefore, John receives a tax reducer of £750 (£15,000 X 5%). The tax liability is then:

  • £14,000 tax calculated as above less
  • £750 tax reducer
  • £13,250 tax to pay

As we can see John now pays £1,250 more tax in 17/18 than he did the prior year on exactly the same amount of real profit made.

The Buy, Refurbish and Refinance strategy

Many UK landlords like to state that they have “no money left in the deal”. This means that they have purchased a property, added value and refinanced it. The amount of refinancing means that they can pay themselves out of the deal. This is known as the buy, refurbish and refinance strategy.

Lucy buys a buy to let property for £100,000, which was 25% below market value. Lucy puts in £25,000 of her own money and £75,000 mortgage.

She modernises the property by installing a new kitchen and bathroom features. Lucy also takes the time to redecorate the entire property and outs in new doors and windows. Lucy spends £50,000 on the property.

The deposit and refurbishment is now an investment by Lucy of £75,000

Lucy approaches the mortgage broker and is able to get a mortgage of £150,000 in just six months. This is because the values feel the property is now worth £200,000.

Lucy now has no money left in the deal as £150,000 increase the loan debt by £75,000.

This all sounds very good and well. However, the amount of mortgage interest that she now needs to pay has increased. This decreased the profit now made, Lucy does not get the full tax relief on this investment and is now in danger of not making any money at all.

You need to ensure that you do the calculations when you embark upon the BRR strategy.

Basic rate becoming higher rate taxpayers

It is possible that the basic rate becomes higher rate taxpayers. This is because the mortgage interest cost is moved out of the property profits. This means that taxpayers will show a greater paper profit than actually realised. This is all because of the new tax rules for mortgage interest.

Loss of child benefit

Optimise - Section 24 and child benefits

If the person was claiming child benefit allowance they would be asked by HMRC to repay this. Child benefit may be claimed by individuals with children that earn typically less than £50,000. Anything above this amount will result in a child benefit reclaim by HMRC using the below formula.

Earned salary less £50,000

———————————     (% result) X Child Benefit Received



Someone earning £55,000 would have a tax charge of:

– 50% = £5,000 (£55,000 less £50,000) divided by 100

– £538.20 = 50% (above) £1,076.40 (52 weeks X £20.70).


Download your buy to let tax guide here, written by our property accountants

Section 24 mortgage interest relief cap prevents UK landlords from offsetting mortgage interest costs against their rental income

Loss of personal allowance

Optimise Accountants: Section 24 mortgage interest relief and personal allowances

Some of you reading this will see that the person above has a taxable income of £95,000.

However, once the Budget announcement changes kick in (mortgage interest relief) fully the taxable income will be restated as £135,000. This means that the person will lose their personal allowance.

If you earn more than £100,000 then you will be aware that your personal allowances are being eroded by £1 for every £2 of earnings above £100,000.

Someone that now has a paper taxable profit of £130,000 would lose their entire personal allowance.

Someone that earns £120,000 would lose an element of their personal allowance, as follows:

£20,000 Excess of earnings limit =  (£120,000 earnings less the £100,000 limit)

£10,000 Reduction to personal allowance (£20,000 excess divided by 2)

£1,850 Revised personal allowance (£11,850 less £10,000)

Loss of pension allowance

You usually pay tax if savings in your pension pot goes above the annual allowance.

This is currently £40,000 a year, provided that you earned this amount of money.

As shown from the Government website from April 2016 you’ll have a reduced (‘tapered’) annual allowance if both the following apply:

your ‘threshold income’ is over £110,000 – this is your income excluding any pension contributions (unless they’re paid as a salary sacrifice by your employer)

your ‘adjusted income’ is over £150,000 – this is your income added to any pension contributions you or your employer make

For every £2 over the above-mentioned amounts, you’ll see a reduction of £1 to your pension contribution allowance.

How to mitigate the impact of Section 24 mortgage interest relief cap

There are many ways in which you can avoid the issue of higher tax due to Section 24. It is essential that you start your tax planning now to avoid the headaches later.

How can our property accountants help you reduce your buy to let tax?

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