Section 24 explained
for Harrow landlords.

What Section 24 is and what changed

Before April 2017, a buy-to-let landlord in Harrow could deduct their full mortgage interest payment from their rental income before calculating the tax owed. If a property generated £15,000 of rent and the annual mortgage interest was £10,000, the taxable rental profit was £5,000 — regardless of whether the landlord was a basic rate or higher rate taxpayer.

Section 24 of the Finance (No. 2) Act 2015 changed this fundamentally. Phased in between 2017 and 2020, the change replaced the full interest deduction with a flat 20% tax credit on mortgage finance costs. By April 2020 the transition was complete: no landlord can deduct mortgage interest from rental income. Instead, the gross rental income is taxed in full (after other allowable expenses), and a 20% tax credit is applied to the finance costs.

For a basic rate taxpayer, the net effect is broadly neutral — the 20% credit offsets the 20% tax that would otherwise be paid on the interest-equivalent amount. For a higher rate taxpayer, the difference is stark: previously the interest cost a net 40p in tax per pound of relief; now the credit provides only 20p of relief, effectively costing an extra 20p per pound of mortgage interest. For additional rate taxpayers, the gap is 25p per pound. This is why Section 24 has had such a severe impact on leveraged buy-to-let landlords across Harrow.

How the 20% tax credit works in practice

The calculation sequence for a Harrow landlord under Section 24 is:

The critical point is step 2: mortgage interest is not deducted. This means taxable rental profit is calculated before finance costs, which can push a landlord's total income into a higher rate band even when their actual cash return is modest or negative.

Worked example: Pinner landlord before and after Section 24

Consider a Pinner landlord with employment income of £45,000 and a buy-to-let property generating £18,000 per year in rent. The mortgage interest is £9,000 per year and other allowable expenses (agent fees, insurance, maintenance) total £3,000.

Illustrative figures. 2024/25 rates. The landlord remains a higher rate taxpayer under both scenarios due to employment income.

When Section 24 creates a tax bill despite a cash loss

The most counterintuitive consequence of Section 24 is the possibility of owing income tax in a year when the rental property has generated an actual cash loss. This occurs when the mortgage interest and other expenses together exceed the rental income — a situation that arose for many heavily leveraged Harrow landlords after interest rates rose sharply from 2022.

Consider a Stanmore landlord whose property rents for £20,000 per year but whose mortgage interest has risen to £22,000 following rate increases, with other expenses of £2,000. The actual cash position is a £4,000 annual loss. Under Section 24, however, the taxable calculation looks different:

This is not an extreme scenario. It affects many Harrow landlords who purchased with high loan-to-value mortgages before 2022 and have seen interest rates more than double since then. Professional tax advice is particularly urgent for this group, as the interaction between mortgage costs, rental income, and employment earnings can create an unsustainable annual tax burden.

The stacking effect with employment income

A central feature of Section 24 that catches many Harrow landlords off guard is how rental income interacts with employment earnings to determine the effective tax rate. Because income is stacked — employment income occupies the lower bands first, with rental income taxed on top — even a modest rental profit can be taxed at the higher rate for a landlord earning a reasonable salary.

A Hatch End landlord earning £38,000 from employment and making £12,000 of taxable rental profit (after expenses, before finance cost credit) has total taxable income of £50,000. The rental profit — sitting above the basic rate limit of £37,700 after personal allowance — is taxed at 40%, not 20%. This stacking effect means that even landlords who consider themselves basic rate taxpayers from employment alone can find their rental income taxed at the higher rate.

Mitigation strategy 1: pension contributions

The single most tax-efficient mitigation strategy for most Harrow landlords is pension contributions. Personal pension contributions reduce total adjusted income — the figure used to calculate income tax — and can therefore change the rate at which rental income is taxed, and whether the personal allowance is tapered.

For the Pinner landlord in the worked example above, who has total income of £60,000 under current rules, a pension contribution of £9,730 (the amount needed to bring total adjusted income back to £50,270, the basic rate limit) would reduce the rate on the marginal rental income from 40% to 20%. The pension contribution attracts 40% relief — making it effectively free after tax — and the rental income tax saving compounds on top of it.

The annual pension allowance is £60,000 (or 100% of earned income if lower). Carry forward provisions allow up to three years of unused annual allowance to be contributed in a single year — a mechanism that allows Harrow landlords who have not maximised pension contributions in previous years to make large one-off contributions that dramatically reduce the current year's rental income tax liability.

Mitigation strategy 2: spousal transfer and income splitting

Where one partner in a marriage or civil partnership pays tax at a lower rate than the other, transferring the beneficial interest in a rental property to the lower-earning partner can reduce the overall household rental income tax bill. If the lower-earning partner is a basic rate taxpayer and the property is transferred to them, the rental profit is taxed at 20% rather than 40%.

A declaration of trust (Form 17 filed with HMRC) is required to split rental income in a ratio other than 50/50 for jointly held property between spouses. Without the declaration, HMRC treats rental income as split equally regardless of the actual ownership proportion.

Mitigation strategy 3: portfolio incorporation

A limited company holding buy-to-let property is not subject to Section 24. Companies can deduct mortgage interest as a business expense in full, paying corporation tax (19% for small profits, 25% for profits above £250,000) on the net profit rather than income tax at 40% or 45%. For heavily leveraged higher-rate landlords, this structural difference can be significant.

However, incorporating an existing residential property portfolio carries substantial one-off costs that must be weighed carefully against the ongoing tax saving:

For most Harrow landlords with modest portfolios, the upfront costs of incorporation outweigh the tax saving unless the portfolio is large, the leverage is very high, and the landlord intends to hold the properties for many years. A professional break-even analysis, modelling the specific portfolio numbers over a 10–15 year horizon, is the only way to determine whether incorporation makes financial sense.

Disposal timing and CGT planning

For Harrow landlords who have concluded that the Section 24 impact makes continued ownership uneconomic — particularly those with heavily leveraged properties in a higher interest rate environment — the timing of disposal can significantly affect the CGT outcome.

Capital gains are taxed at 18% (basic rate) or 24% (higher rate) for residential property in 2024/25. A Harrow landlord who disposes of a property in a tax year when their total income — including the gain — falls within the basic rate band pays 18% on the chargeable gain; the same gain taxed in a higher income year is taxed at 24%. For a property with a £100,000 gain, this difference is £6,000.

Disposal timing opportunities include selling in a year of lower employment income (sabbatical, career break, early retirement), using each spouse's annual CGT exemption (£3,000 each in 2024/25) by transferring a half share before sale, and sequencing disposals across multiple tax years where a portfolio is being wound down rather than selling everything in one year.

Section 24 questions from Harrow landlords