Mortgage interest tax relief and Section 24

Scope: Individual residential landlords. Companies and commercial property can have different treatment.

The short answer

An individual residential landlord does not deduct qualifying mortgage interest and other finance costs from rental profit. Relief is instead given as a basic-rate tax reduction.

The reducer is 20% of the lower of qualifying finance costs, property business profits and adjusted total income above allowances.

It cannot create a tax refund. Restricted unused finance costs can carry forward for use in a later year, subject to the same limits.

Why the distinction matters

Under the old deduction approach, interest reduced property profit before that profit entered the Income Tax calculation. The current restriction calculates property profit without that deduction, then applies a reducer later. A higher property-profit figure can therefore affect tax bands, allowance taper and other income-linked calculations even where a reducer is available.

“Section 24” is an informal label for this restriction. It does not mean the whole mortgage payment gets 20% relief.

Start with the same-wave rental income tax guide if gross rent, losses and reporting have not yet been reconciled. Use the separate landlord expenses guide to classify running costs before applying the finance-cost restriction.

Which costs enter the calculation

Qualifying finance costs can include interest on loans used for the residential property business and certain fees connected with obtaining that finance. Mortgage capital repayments are not finance costs. Private borrowing and amounts above the supportable business purpose are excluded.

Trace borrowing to the property business. A loan secured on a rental property is not automatically business borrowing if the funds were used privately. Where borrowing serves residential lettings and another purpose, apportion the finance cost on a just and reasonable basis by reference to the purpose and use of the funds while interest accrues.

The three-part cap

Build these figures:

1. Current qualifying finance costs plus eligible amounts brought forward.
2. Property business profit after brought-forward property losses.
3. Adjusted total income above the Personal Allowance, excluding savings and dividend income for this test.

Use the lowest and multiply by the basic rate, currently 20%.

If property profit or adjusted total income limits the reducer, the unused finance-cost amount can carry forward. Keep a continuous schedule; do not lose the unused balance between returns.

Interaction with the property allowance

The property allowance cannot be used for a tax year in which the individual claims the residential finance-cost tax reducer. Compare the permitted methods before completing the return; do not deduct the allowance and then apply the reducer in the same tax year. Read the property allowance guide for the wider eligibility and exclusion rules.

Worked structure

If qualifying finance costs are £8,000, property business profit is £6,000 and adjusted total income for the limit is £10,000, the lowest figure is £6,000. The maximum reducer on these simplified facts is £1,200 at 20%. The remaining £2,000 finance-cost amount may carry forward.

This example does not calculate final tax and ignores other property or personal facts.

Common mistakes

• Deducting residential interest as an ordinary expense.
• Including mortgage capital.
• Applying 20% to costs without checking all three caps.
• Assuming the reducer can create a refund.
• Losing brought-forward restricted costs.
• Applying individual-landlord rules to a company.

What to do next

1. Separate capital and interest from lender statements.
2. Establish business use of each loan.
3. Calculate property profit without restricted finance costs.
4. Work through the three limits.
5. Record the reducer and carry-forward.
6. Reconcile the return and retain the schedule.