How Section 24 Amplifies Tax for Higher-Rate, Leveraged HMO Landlords

Section 24 and HMOs: Tax Impact, Examples, and Fixes

Section 24 changed how UK individual landlords are taxed by removing the deduction for finance costs and replacing it with a flat 20 percent tax credit. For higher rate owners of houses in multiple occupation, the result is simple: taxable profits are computed before interest, which inflates the tax base while leaving cash thin. This guide explains the mechanics, shows worked examples, and outlines practical fixes so you can decide when a company structure is worth the complexity.

Definitions that shape the outcome

An HMO is a residential property rented by the room to unrelated tenants who share kitchens or bathrooms and usually require a license. A higher rate landlord is an individual whose rental income sits in the 40 percent or 45 percent income tax band. Section 24 is the UK rule that replaces interest deductibility for individual residential landlords with a flat 20 percent income tax credit.

Section 24 comes from Finance Act 2015 and has been fully live since 2020 to 2021. It applies to individuals, partnerships of individuals, and trustees running residential property businesses, and it does not apply to companies. HMOs are still residential for tax, so most HMO finance costs fall under this rule unless the assets sit in a company. Finance costs include interest, mortgage and arrangement fees, and related charges. The 20 percent credit is calculated on the lower of finance costs, property profits before interest, or adjusted total income, and any unused finance costs carry forward as a timing item.

How Section 24 creates a wedge between tax and cash

The rule’s impact shows up through three linked mechanics that widen the gap for leveraged HMO owners.

Tax base inflation: Property profits for individuals are computed before interest. That higher figure is taxed at 40 percent or 45 percent for many HMO landlords. The 20 percent credit on finance costs does not match those rates, so interest becomes a partial reducer rather than a full shield.
Band creep and cliff edges: Because interest no longer reduces adjusted net income, grossed up rental profits can push owners into higher bands and trigger personal allowance taper above £100,000 and the High Income Child Benefit Charge above £50,000. The 20 percent credit does not lower adjusted net income, so it cannot stop those cliff effects.
Loss paradox: An economic loss after interest can still produce a tax bill. The tax base ignores interest, and the 20 percent credit may not wipe the tax on that pre interest profit. Unrelieved finance costs roll forward, and no cash refunds arise.

Cash flow examples for HMOs under Section 24

A simple example shows why leveraged HMOs feel the squeeze when owned personally in higher rate bands.

Case 1, moderate leverage: Rents of £100,000, expenses excluding finance costs of £35,000, and finance costs of £45,000. Economic profit is £20,000. Taxable property profit is £65,000. Income tax at 40 percent is £26,000. The finance cost credit at 20 percent of £45,000 is £9,000. Net tax on the property business is £17,000, leaving £3,000 of cash after tax. That is an 85 percent effective rate on economic profit. If adjusted net income lands above £100,000, personal allowance taper drives the marginal rate higher on that slice.

Case 2, stressed leverage: Rents of £80,000, expenses excluding finance costs of £25,000, and finance costs of £60,000. The economic result is a £5,000 loss. Taxable property profit is £55,000. Income tax at 40 percent is £22,000. The finance cost credit is capped at 20 percent of £55,000, or £11,000. Net tax due is £11,000 despite an economic loss. The £5,000 excess finance costs carry forward. If the landlord also earns a salary, this tax is payable via Self Assessment.

Why HMOs intensify Section 24 pressure

HMOs usually carry higher gross rents and higher operating costs per unit than single lets. Utilities, compliance, licensing, and tenant turnover add up. Many HMO capital projects fail the repairs test and are not deductible against rental income for individuals. Pair that cost profile with higher leverage in typical HMO geographies, and Section 24’s wedge grows larger.

What Section 24 does not do

Not a cap on interest paid: It caps the tax relief on finance costs at 20 percent.
Not a company rule: Companies deduct interest under the loan relationships rules, subject to the corporate interest restriction.
Not a commercial rule: Commercial income and the commercial portion of mixed use sit outside the regime, and apportionments must be evidence based.
Not a capital gains change: It targets income tax on rents, not Capital Gains Tax.

Stakeholder incentives change with tighter cash

Individual higher rate landlords see net yields compressed and often respond by slowing capital expenditure, reducing leverage, selling, or moving new deals into companies. Lenders lift interest coverage requirements for HMOs, and regulatory standards back tougher stress testing where operating costs are volatile. Local authorities want compliant HMO supply and enforce licensing. Tenants may face rent increases where markets allow pass through, but in soft markets landlords absorb more pressure.

Structuring choices that can realign tax with economics

SPV company for new purchases

A UK company removes Section 24 exposure because interest is deductible when calculating corporation tax. Current rates are 25 percent main rate with a 19 percent small profits rate up to £50,000 and marginal relief up to £250,000. The corporate interest restriction limits net tax interest to £2 million per group per period by default. Most small special purpose vehicles fall below that threshold but should monitor associated company rules. For an overview of SPV expectations, see SPV lender norms and setup steps at Companies House.

Partnership to company transfers

Moving an existing personal portfolio to a company can work, but plan for Capital Gains Tax and Stamp Duty Land Tax. Incorporation relief under TCGA 1992 section 162 can defer CGT if you transfer a going concern in exchange for shares and you truly run a business, not a passive investment. SDLT relief for general partnerships exists only in tight cases. Lender consent, license transfers, and timelines require careful sequencing.

Mixed use apportionments

Adding genuine commercial space can keep that portion outside Section 24. Documentation and actual use must match the apportionment, and the management model will differ from pure residential.

Operational cash cycle and tax timing

Cash in: Room rents and ancillary charges.
Cash out pre debt: Repairs, compliance, licensing, agents, utilities, and insurance.
Finance costs: Interest, arrangement and exit fees, hedging costs, and guarantee fees.
Tax computation: Taxable property profit equals rents minus allowable expenses excluding finance costs, then apply marginal rates. The 20 percent reducer is based on the lower of finance costs, property profits, or adjusted total income. Excess finance costs carry forward.
Payment dates: Self Assessment balances and payments on account fall due on January 31 and July 31, often months after the year end, so forecast the lag to avoid surprises.

Cost stack and where leakage occurs

One off: Arrangement fees, valuation, legal, licensing, and conversion capital expenditure.
Recurring: Mortgage interest, agents, utilities, cleaning, repairs, license renewals, inspections, accounting, and tax filings.
Individuals’ leakage: The 20 percent cap on finance cost relief plus personal allowance taper and Child Benefit charges via adjusted net income.
Companies’ leakage: Corporation tax on profit after interest, dividend tax on extraction, possible CIR at scale, and unallowable purpose issues for connected party loans.

Accounting, reporting, and record discipline

Individuals use property income rules on a cash or accrual basis. Track finance costs and carryforwards precisely because lost records equal lost relief. Companies apply FRS 102, interest follows the effective interest method, and deductions fall under the loan relationships rules. Deferred tax may arise on timing differences. SPVs roll up into group accounts if consolidated, and an SPV label does not create off balance sheet magic. Disclose related party loans, guarantees, and going concern assessments, especially near rate resets within 12 months.

Regulation that directly hits HMO cash

Local HMO licenses set occupancy limits, amenity standards, and management conditions, and breaches can trigger insurance issues and loan defaults. Mortgage regulation expects stress testing and adequate interest coverage ratios, and HMOs often carry higher hurdles given operating complexity. Energy standards apply and upgrading shared systems can be capital heavy, so you should build that into cash tax planning because capital items do not reduce current taxable property profit for individuals. For licensing and planning considerations by city, see the HMO checklist and local Article 4 coverage.

Risk drivers and edge cases to model early

Rate resets: With only a 20 percent credit on finance costs, higher rates bite harder than before. Maintain headroom on coverage and covenants.
Rent ceilings: Student and young professional markets can cap room rates during weak demand, so pass through is not guaranteed.
Repair vs improvement: Misclassifying works increases audit risk now or later. Classification discipline keeps tax close to economic reality.
Mixed use splits: Aggressive apportionments invite challenges from lenders and tax authorities.
Carryforward buildup: Prolonged high rates can create large carryforwards that require strong future profits to use.
Debt structure: Connected party loans into SPVs need commercial terms to avoid disallowance. Moving debt around personally does not fix Section 24.
Personal allowance taper: Adjusted net income between £100,000 and £125,140 triggers high effective marginal rates that Section 24 can accelerate.
Scotland: Different bands apply to non savings income, and the reducer remains 20 percent, which slightly alters the gap to marginal rates.

Comparisons to decide if a company is worth it

Individual ownership with low leverage can work if you sit in the basic rate band or finance costs are modest because the 20 percent credit roughly matches your marginal rate. The model becomes fragile as leverage or marginal rate rises. A corporate SPV with high leverage keeps taxable profit closer to economic profit because interest is deductible. At 25 percent corporation tax, £20,000 of profit attracts £5,000 of company tax versus £17,000 in the higher rate individual illustration above. Dividend extraction adds tax, but retained earnings that deleverage the balance sheet defer personal tax and compound returns. For background on SPV pros and cons, you can also review what a special purpose vehicle does in finance.

A pivot to mixed use can change the tax treatment, but leasing and management differ from pure residential. Deleveraging or selling reduces the Section 24 wedge immediately, although SDLT and Capital Gains Tax on disposals must be modeled. The government plans to abolish the furnished holiday letting regime from April 2025, so that historical alternative does not solve HMOs.

Implementation notes and realistic timelines

New buys via SPVs are the cleanest execution: incorporate, open accounts, line up HMO suitable lending, satisfy license conditions precedent, and complete. Timelines hinge on lender underwriting and council processes. Incorporating an existing portfolio requires mapping valuations, reliefs, lender consents or refinances, license transfers, and corporate setup. If section 162 applies, keep the business intact and avoid cash consideration that breaks relief. Most lenders treat a transfer to a company as an event of default that requires refinance, so model new rates, fees, and tax outcomes over five to ten years under both structures before moving. For the tax transfer side, refer to SDLT bands and surcharges.

Kill tests that save time

Finance cost share: If finance costs exceed 50 percent of rents and you are in the 40 percent or 45 percent band, expect an effective tax rate on economic profit north of 60 percent and possible tax even in economic loss cases.
Adjusted net income: If your income crosses £100,000, model personal allowance taper explicitly and decide if the marginal rate exceeds your hurdle.
Incorporation relief: If you plan to incorporate but run a passive portfolio, do not assume section 162 relief will apply without evidence of a business.
Carryforward utilization: If you cannot use carried forward finance costs within five years on conservative assumptions, treat them as stranded.
CIR at scale: If corporate interest restriction could bite due to group aggregation, combine expected SPVs and measure against the £2 million de minimis with buffers.

Decision screens for investors and lenders

For any HMO held personally, compute taxable profit before interest, apply marginal rates to that base, calculate the 20 percent credit on the constrained amount, then compare cash tax to economic profit. Note the implied effective tax rate and run sensitivities for rates, voids, utilities, and management costs. HMOs’ rents and costs per room swing faster than whole house lets, so build that volatility into your model. Add personal allowance taper and Child Benefit where relevant because the tax reducer does not lower adjusted net income. Then compare to a company case that models corporation tax after interest, dividend tax on extraction, retention that deleverages, and lender pricing for SPV loans versus personal borrowing.

Governance and lender alignment

Cash control: Ring fence rent accounts by property and track finance cost carryforwards accurately in personal cases because lost tracking equals forgone relief.
Information rights: Lenders may require licenses, safety certificates, and management agreements at origination and annually. A missing license can put you in default.
Guarantees: SPV loans often require director guarantees; check covenant capacity and cross defaults across the portfolio.
Stress tests: Align your internal rent and rate stresses with or above lender parameters to avoid refinance traps when fixed periods end.

Practical mitigation levers you can pull now

Reduce LTV: Lower leverage so finance costs take a smaller bite out of rents. This shrinks the Section 24 wedge directly.
Use SPVs for new buys: Reserve personal ownership for low LTV assets where you remain in the basic rate band. See our Section 24 explainer for detail.
Manage adjusted income: Use pension contributions or Gift Aid to protect the personal allowance. This does not change Section 24 but reduces high marginal slices.
Align renewals: Match debt fixings to license cycles to avoid a double hit from rate resets and renewal costs in the same quarter.
Document capex: Repairs are deductible and improvements are capital. Keep invoices and descriptions clear to defend classifications.
Optimize mortgage structure: Consider whether interest-only mortgages fit your risk tolerance and lender ICR rules in an SPV framework.

A quick stress test you can run in five minutes

A simple rule of thumb highlights when personal ownership starts failing. First, compute pre interest margin as rents minus all non finance costs divided by rents. Second, compute interest as a percent of rents. If interest exceeds your pre interest margin by more than 5 percentage points and you are in the higher rate band, the personal case likely pays tax on little or no economic profit. As a cross check, multiply your pre interest profit by your marginal rate and subtract 20 percent of finance costs. If the result is more than half of your economic profit, the wedge is large enough to justify exploring an SPV route and lender terms for that SPV. For SPV setup specifics, review Companies House steps.

Closing Thoughts

Section 24 turns interest for individual residential landlords into a capped credit and taxes a profit figure that ignores finance costs. For leveraged HMO portfolios owned by higher or additional rate taxpayers, the effect is more tax on less cash, and sometimes tax even when the business runs at an economic loss. HMOs’ heavier operating and compliance costs intensify that pressure, and lender standards push the same way. If you plan to grow with leverage, a company structure often lines up taxes with economics and lets you reinvest earnings before personal extraction. The decision turns on two sliders, leverage and marginal rate, so do the arithmetic first and pick the structure that compounds after tax cash flow without drama.