Section 24 Explained: Tax Impact on Leveraged Buy-to-Let Portfolios

UK Section 24 Tax: What Mortgaged Landlords Must Know

Section 24 limits how individual landlords in the UK get relief for mortgage interest on residential rentals. Instead of deducting interest from rental income, affected owners receive a 20 percent tax credit against their income tax bill tied to property income. In practice, higher rate taxpayers who use debt now pay tax on a larger slice of rent, and only a fifth of the interest cost is relieved. The payoff for understanding the rules is straightforward: structure your holdings to preserve post-tax cash, or Section 24 can turn paper profits into real cash deficits.

Context and why it matters now

The change hits a large and debt-reliant market. England had roughly 4.6 million private rented sector households in 2022-23. Companies can still deduct interest under corporation tax rules, but individuals cannot. With higher interest rates and stricter affordability tests, that difference now drives strategy, not footnotes. Regulators also expect lenders to consider tax explicitly in portfolio underwriting, so the cash impact is not just an HMRC issue – it shows up in loan approvals and covenants.

How Section 24 works in plain English

For individuals who let residential property directly or through transparent partnerships or LLPs, “finance costs” include mortgage interest, interest on loans to buy furnishings, and certain fees treated as finance costs. These no longer reduce taxable rental profit. Instead, a basic rate tax credit is given each year equal to 20 percent of the lower of the finance costs incurred, the property business profits, or adjusted total income above the personal allowance.

Three pain points shape outcomes:

Leverage effect: When interest consumes a large share of rent, you still pay income tax on rent less non-finance costs, then get only a 20 percent credit on interest. For higher rate taxpayers, the effective tax rate on true economic profit climbs quickly as debt rises. The result is faster cash erosion when rates reset.
Credit cap: The credit is capped by profit and adjusted income. Excess finance costs carry forward as “unrelieved finance costs.” That defers relief but never creates a refund, so there is no cash help in the current year.
Property business basis: The rules apply across the UK property business, not per property. Losses from non-finance costs carry forward, but finance costs alone do not create losses – only the 20 percent credit.

Who is affected – and who is not

Inside the fence

Individuals holding residential buy-to-let property directly or via transparent partnerships or LLPs are within scope. Each partner’s credit is capped at 20 percent.

Outside the fence

Companies: Interest remains deductible under corporation tax rules, subject to general limits like the Corporate Interest Restriction.
Furnished holiday lettings: Qualifying properties that meet availability and occupancy tests can still deduct interest.
Commercial property: Offices, industrial, and registered social landlords are not within Section 24.

Mixed portfolios must allocate interest by the use of funds. If a loan spans residential and commercial assets, document the allocation and keep the audit trail clean. That reduces disputes and supports interest deductibility where it is still allowed.

Cash flow and the tax choke point

The cash path under individual ownership is simple: rent comes in; operating costs go out; mortgage payments follow; then tax is computed on rent less non-finance costs with the 20 percent credit applied to finance costs. The bottleneck is repayment capacity after tax. Section 24 shifts tax from a profit-based charge to something closer to a gross-income charge with a partial offset. At higher leverage and higher marginal rates, your post-tax cash after interest can turn thin.

Lenders may have ignored tax in retail buy-to-let origination. Portfolio and private credit lenders increasingly do not. Some lenders compute debt service coverage ratio pre-tax; others apply a standardized tax load. If you ignore tax under Section 24, you can overstate true coverage and face refinancing surprises. For a quick sense-check, a rule of thumb is: tax-adjusted DSCR equals post-tax cash before principal divided by interest. To go deeper on the calculation and why lenders rely on it, see a primer on debt service coverage ratio.

Illustrative economics on one property

Assume one property with rent of £18,000, non-finance costs of £3,000, interest of £10,800 (about 60 percent gearing), separate capital repayment, and a landlord at a 40 percent marginal rate.

Under Section 24: Taxable profit is £15,000. Income tax is £6,000. The tax credit is £2,160. Net tax is £3,840. Post-tax cash before capital repayments is £1,360.
With capital repayment: Add a £2,000 capital repayment and the property runs £640 cash negative.
Company comparison: If a company pays 25 percent corporation tax and fully deducts interest, profit before interest is £15,000 and after interest is £4,200; corporation tax is £1,050; post-tax cash before capital repayments is £3,150.

The lesson is simple: for leveraged assets, corporate ownership typically preserves more cash.

The corporate route and guardrails that matter

Companies deduct interest when computing taxable profits, with these checks in mind:

Corporate Interest Restriction: Net interest above £2 million per group per year can be limited to 30 percent of tax-EBITDA or a group ratio. There are carry-forward features, so model at the group level and be ready to file annual interest allowance returns.
Transfer pricing: Related party or cross-border debt must be arm’s length in rate and amount. SMEs can be exempt from transfer pricing but not from anti-hybrid rules. Document terms and avoid profit-linked features marketed as “interest.”
Hybrid mismatch rules: Instruments or entities that create deduction or no-inclusion outcomes can deny deductions. Keep shareholder debt straightforward.
Extraction frictions: The main corporation tax rate is 25 percent with small profits relief, but extracting profits later creates a second tax layer if paid as dividends or salary. Even so, the benefit of full interest deductibility often outweighs extraction frictions if cash can be retained to service debt and grow.

Partnerships and LLPs are transparent. A corporate member can shelter its share under corporation tax; individual members remain within Section 24. Mixed-member designs must be commercial and supported by capital and risk alignment. HMRC reviews arrangements that shift profits without substance.

What Section 24 leaves outside the rules

Furnished holiday lettings: Interest deductibility can apply if statutory tests are met. Keep records current and watch for policy shifts.
Commercial property: Non-residential property is not within Section 24.
Companies: New acquisitions via an SPV preserve interest deductibility, subject to general rules like CIR.

Market signals and lender behavior

Institutional build-to-rent is growing but remains a minority of the private rented sector. Since 2022, higher interest costs have pushed many leveraged portfolios to thin coverage. Supervisors flagged sensitivity to rate resets, and lenders raised stress-rate and interest coverage hurdles. The PRA expects portfolio underwriting to account for taxes, voids, and expenses, not just headline interest cover. That means a tighter credit box for individual landlords at renewal.

What lenders will ask for

Individual or small SPV borrowing

Documents: Standard mortgage forms with interest coverage tests, tenant restrictions, and transfer or incorporation consents.
Security: First legal charge and assignment of rents; SPVs often grant a debenture; personal guarantees are common for small company SPVs.
Covenants: Rent account controls, limits on further debt, and regular reporting.

Portfolio or block financing to companies

Structures: Term loans or RCFs with pool-level LTV, ICR or DSCR, debt yield, and arrears triggers.
Cash management: Controlled rent accounts and sweeps, with consents for disposals, leverage changes, and intercompany loans.
Reporting: Rent rolls, arrears data, valuations, and tax compliance confirmations.

Some lenders compute DSCR pre-tax, while others factor a standardized tax load. Under Section 24, ignoring tax can overstate true coverage, so refinancing can surprise borrowers who under-modeled tax.

Planning responses and key trade-offs

Deleveraging: Lower debt cuts interest that only attracts a 20 percent credit. Cash improves, while return on equity may fall. The upside is better DSCR and refinancing capacity.
Incorporation: Moving into a company shifts you to full interest deductibility. Weigh capital gains tax on transfer, the potential for incorporation relief if a genuine property business moves as a going concern, stamp duty land tax on connected transfers, lender consents and refinancing, ATED compliance for high-value dwellings, and ongoing costs and extraction taxes. To understand structures and lender expectations, read about UK buy-to-let SPVs.
New buys via SPV: Many keep legacy stock in personal names and buy new assets in companies. That avoids immediate CGT or SDLT on old assets, but adds structural complexity. For first steps, see property SPV filings.
Mixed-member partnerships: Routing a portion of profits to a corporate member can help, but substance and pricing must be right.
FHL pivot: Short-stay strategies can move assets outside Section 24 if thresholds are met. Consider VAT, business rates, and the risk of rule changes.
Exit or partial disposals: Sell low-yield, high-debt units and recycle into higher-yield stock. That may mean CGT today for stronger coverage tomorrow.

SPV tax mechanics in brief

Finance SPVs with third-party loans and arm’s length shareholder debt. Avoid profit-linked interest features. Group relief can offset profits and losses within a group, and CIR can be managed across entities. Withholding tax on cross-border interest may require exemptions or treaty clearance. Most inbound dividends are exempt, while outbound dividends are taxed at the shareholder. Salaries and fees are deductible but come with payroll obligations. If you are weighing structure choices, compare the SPV vs personal name trade-offs.

Accounting and reporting that trip owners up

Individuals compute property business profits on an accrual basis. Section 24 adds a separation between tax and mortgage cash flows, so mind the timing gap. Companies apply UK GAAP or IFRS, with investment property often measured at fair value through profit or loss. Lenders may prefer historical-cost-based covenants plus independent valuations. Consolidation may be required for holding structures, and you should disclose related party financing and covenant terms.

Regulatory touchpoints most landlords miss

Conduct perimeter: Most buy-to-let lending is unregulated for conduct. Portfolio and corporate loans sit within prudential and anti-money laundering frameworks.
Ownership transparency: Companies must file persons with significant control information. Overseas owners of UK real estate must register and keep filings current.
Non-resident landlord rules: Agents or tenants must withhold tax unless HMRC authorizes gross payment. If you are new to UK taxation of rent, start with a primer on UK rental income.
Transaction taxes: SDLT updates matter. The abolition of Multiple Dwellings Relief raises costs for blocks. For a refresher on mechanics, review transfer taxes and stamp duties.

Key risks to underwrite upfront

Post-tax cash squeeze: Higher rates and static rents can cause cash deficits even when pre-tax profits exist. Expect covenant strain and refinance pressure.
Tax-credit cap: If profits are small, the 20 percent credit may not be fully usable in-year. Carry-forward is not liquidity.
Hybrid and shareholder debt traps: Hybrids can deny deductions. Keep instruments straightforward and at arm’s length.
Incorporation frictional taxes: SDLT and CGT can dominate first-year savings. Avoid artificial steps with weak substance.
ATED filings: Relief often removes the charge, but filings are still required and penalties add up if missed.
FHL compliance: Falling short on occupancy tests reintroduces Section 24. Keep detailed records.
Repairs vs capital: Aggressive expensing invites challenge and can distort cash planning.

Comparisons and practical alternatives

Corporate SPV vs personal name: Corporate wins where leverage is material and profit extraction can be timed. Personal ownership can still work for basic rate taxpayers, low leverage, or investors who value simplicity.
Portfolio sale to a corporate buyer: Crystallizes taxes but removes Section 24 exposure and redeploys capital. Buyers will price in higher SDLT without Multiple Dwellings Relief.
JV with a corporate partner: Centralizes debt and interest deductibility, but adds governance and transaction friction.
Debt reduction vs yield growth: Renovations can lift rents but create voids and potential capital treatment. Debt reduction improves coverage immediately.

Execution timeline that keeps deals on track

Weeks 0-2 – Diagnose: Model post-tax DSCR property by property. Flag units with rate resets and weak coverage. Pull loan documents and consent requirements.
Weeks 2-6 – Choose structure: Compare individual status quo, new SPV for future buys, or full incorporation. Get advice on incorporation relief and partnership SDLT relief. Line up conveyancer and lenders.
Weeks 6-10 – Engage lenders: Pre-clear SPV terms. Price refinancing and early repayment charges.
Weeks 10-16 – Execute: Form the SPV, transfer where viable, file SDLT and ATED reliefs, update rent mandates and accounting. Stand up cash management and tax registrations.
Week 16+ – Stabilize: Monitor coverage, set dividend policy consistent with CIR headroom, and plan the next acquisition or deleveraging step.

Economics and fees to expect

One-off: Legal and conveyancing, valuations, arrangement fees, SDLT, CGT, early repayment charges, and tax advice. These can outweigh first-year savings but amortize over a multiyear hold.
Recurring: Accountancy, company secretarial, ATED returns where relevant, lender non-utilization fees, management, and tax compliance.
Pricing: SPV loans can carry slightly higher margins than retail individual buy-to-let, while portfolio lines can be cheaper per asset at scale. With full interest deductibility, corporate structures usually outperform at moderate to high leverage.

Quick kill tests for fast triage

High interest load: If interest exceeds 50 percent of rent and you pay higher rate tax, Section 24 likely drags post-tax DSCR. Model it before adding debt.
CIR threshold: If group net interest tops £2 million, test CIR and build it into the case.
Business evidence: If you lack proof that you run a business with systems, records, and active management, incorporation relief is uncertain.
Lender consent: If your lender will not consent to transfers to an SPV without full refinancing, weigh all-in costs against five-year savings.

Governance to lock in from day one

Use-of-funds trail: Keep a clean audit trail for mixed portfolios. It drives interest allocation and reduces disputes.
Track carry-forwards: Record unrelieved finance costs annually, but do not rely on them as liquidity.
Arm’s length documentation: For mixed-member partnerships and shareholder loans, maintain clear terms and minutes.
Cash controls: Install rent sweeps, segregated accounts, and dual authorization in SPVs. It reassures lenders and auditors.

What to do now

Re-underwrite with tax: Model Section 24 post-tax DSCR and the corporate counterfactual, including CIR and realistic extraction assumptions.
Segment the book: Deleverage or sell weak units. Do not force marginal assets through a costly incorporation.
Default new buys to SPVs: Unless you remain a basic rate payer at low leverage, default future acquisitions to companies. If you are deciding structure, review SPV vs personal name guidance.
Align lenders: Shift relationships to SPV or portfolio underwriting. Seek covenants that match post-tax cash generation.
Embed compliance: Stand up ATED processes, CIR filings where needed, and related party files in order.

Conclusion

Section 24 taxes gross rental income for individuals and offers only a 20 percent credit for interest, reshaping the economics of leverage for personal landlords. Companies regain full interest deductibility but bring CIR, extraction taxes, and governance overhead. Choose the structure that preserves post-tax cash across cycles, plan the transition cost with eyes open, and insist on post-tax coverage metrics in every underwriting memo. In real estate, after-tax cash pays the mortgage.