Section 24 Mortgage Interest Relief impact on Landlords?


Simon Misiewicz

15th February 2019

Article relevant to the tax year 2019/20

Your Section 24 mortgage interest relief tax questions answered

In this article we are going to try and answer the following questions:

– What is mortgage interest relief?

– Can I claim tax relief on mortgage interest UK?

– Does mortgage interest reduce taxable income?

– Does property tax reduce taxable income?

– Can I deduct 100 mortgage interest?

– What are the new tax rules when it comes to mortgage interest?

Whilst you are reading this article you may wish to read our page on the subject of “buy to let tax rules for UK landlords” where we discuss all the different types of tax that you need to be aware of. Read Here for more (opens in a new tab)

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

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.

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.

Section 24: 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.

Section 24 impact: Loss of child benefit

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 impact: Loss of personal allowance

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 £130,000. 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 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)


Section 24 impact: 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.

Solutions to mitigate the impact of section 24 mortgage interest relief

Solution 1 – Deed of trust

You could transfer property income If you have a spouse that is a lower tax earner. If they remain a basic rate taxpayer once the beneficiary of the properties are transferred then Section 24 may be mitigated. You will need to book some time with us to discuss this.

A deed of trust will be required to show that the beneficiary interest has been transferred over. If you currently own the property, then you will also need to complete a form 17 to tell HMRC that the beneficiary entitlement is no longer 50/50.

You need to be mindful that you need to speak with your mortgage lenders. Please see their terms and conditions to see if you can transfer the beneficiary of the property. If they require the second person to be added to the mortgage then there could well be an SDLT implication as there will be a land transaction based on their share of the mortgage. There is now a double effect with the 3% SDLT surcharge in addition to the SDLT standard rates.

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 Solution 2 – Change of use: holiday lets / serviced accommodation and commercial properties

Section 24 only affects residential properties. If you were to change the use of the property to serviced accommodation, holiday lets or commercial properties then Section 24 may be mitigated.

You need to ensure that you get planning from the local authority to see permission to change the use of the property from C3 to the new use class. You can get more details from the planning portal.

Please check with the mortgage lenders. If you have a standard buy to let mortgage and wish to use the property for another use then you will need to seek alternative financial arrangements.

We have also written a more detailed article all about investing in commercial properties. Be sure to take a read.

Solution 3 – pay down your mortgages

We have seen on a number of occasions that the rate of tax on their property income is forecasted to be between 45% and 135% for higher rate taxpayers once Section 24 is fully implemented by 2020/21.

If you pay off mortgages the maximum tax rate will be 40% for higher rate taxpayer and 45% for additional rate taxpayers.

Paying off mortgages and saving tax may now be a better strategy than using your money to invest in more properties in your own name or indeed in a limited company.

Here is an example of this by 2020/21 when Section 24 is fully implemented

£20,000 rental income

(£10,000) mortgage interest cost

£10,000 cash profit


HMRC will deem the tax return as follows:

£20,000 rental income

(£10,000) mortgage interest cost

(£8,000) tax based on 40% (high rate taxpayers) X £20,000

£2,000 cash left after tax

£2,000 add back tax relief 20% X £10,000

£4,000 cash left after tax

£6,000 tax liability (previously 2015/16 – would have been £4,000 (£10,000 profit X 40%)


The above £6,000 tax is 60% of the rental profit (rental income less mortgage interest). You can also clearly see that the bank and HMRC make more money than the person in the above example.

As you can see there is a hike in tax. Rather than buying more properties in a limited company you could pay of the mortgage and the tax would be as follows:


£20,000 rental income

£8,000 tax (as before)

£12,000 cash after tax


The person now has to pay £2,000 more in tax than the above example but because they have paid off the mortgage they receive more net cash.

Solution 4 – pension contributions

The maximum amount of money that you can invest in your pension is £40,000 per year. The actual pension contributions you can make is just £32,000 as £8,000 is added by the government. In practice £40,000 X 0.8.

The amount of pension contributions you can make is restricted to Net Relevant Earnings (NRE) of £3,600. This means how much money you earn in regard to:

  • Employment income
  • Self-employment income

Please note that property investment, interest and dividend income is not taken into account. If you only have property income of say £50,000 you will still be only allowed to invest £3,600 (NRE rate).

There are other financial benefits of making pension contributions such as National Insurance savings, reducing the impact of losing your personal allowance if you earn more than £100,000. It also helps you to maintain all of your child benefit allowances if you earn more than £50,000.

Salary sacrifice – net pay method

You will receive up to 45% tax relief (based on your taxable earnings) if you have invested into your workplace pension using salary sacrifice (net pay method).

Direct contributions (private pension)

The government will add up to 20% of your pension contributions if you have invested into a private pension directly. You will need to claim the additional 20% (for higher rate taxpayers) / 25% tax (for additional rate taxpayers) on yourself-assessment.

You can get free independent advice on pensions from Money Advice Service and if you are 50+ in age then you can also book an appointment free of charge with Pension Wise

Solution 5 – incorporation of your property portfolio

The laws you are relying on and underpinned by the Ramsey 2013 case at the Upper Tax Tribunal are as follows:

  • 162 of the TCGA 1992 (for the CGT incorporation relief)
  • 15 land and buildings FA 2003 (for the SDLT relief)

The process to achieve this is to move the properties into a simple/ordinary partnership (not to be confused with either a Limited Partnership or Limited Liability Partnership) and then after circa 3 years of operating as a partnership to move the total business in the partnership into a limited company.

Please note that the stamp duty charge is voided (ie never payable) by you following the below process however the CGT is simply deferred under S162 incorporation relief.

The Ramsey Case

The Ramsey case highlighted the critical things that mattered to enable the partnership activities to be classified as a business and these included:

  • 1 partner working in the Partnership for the majority of the working week (for the Ramsey’s this was 20 hours a week by Mrs Ramsey). Although the 20 hours is not a strict number rather than a qualitative measurement that they were actually working in the business
  • 1 partner securing the majority of their income from the Partnership profits
  • 1 partner managing all the letting management activity and ongoing building maintenance and never using a letting agent

On a more basic level in order for there to be a partnership, there need to be two people working together in a commercial business environment to make money (ie not a hobby business). A partnership agreement also needs to be in place (discuss this with a solicitor to make sure it is drawn up effectively).  One person at the very least needs to be in the partnership business managing existing properties. Any work attending networking meetings and seeing new properties will not count. One person in the partnership business will need to manage the tenants, not using letting agents. One person in the partnership business must be responsible for sorting out maintenance work directly with tradespeople, again not using agents. We have written a separate article on how to incorporate your property business into a limited company.

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