What is Section 24

The legislation in Section 24 of the Finance Act 2015 is one of the biggest challenges landlords have had to face in modern times.

Known as the ‘Tenant Tax’, it has cost many rental property owners thousands of pounds.

But what is it, and how does it work?

Section 24 removes a landlord’s right to deduct the majority of their finance costs, including mortgage interest and arrangement fees, from their rental income before calculating their tax liability.

This means landlords have to pay tax on the gross income they earn from a rental property. This can often lead to landlords entering a higher tax bracket. And this one change can make or break a previously profitable portfolio.

And so many landlords have been pushing up rents in an attempt to offset the difference in tax paid. This is how we arrive at the so-called Tenant Tax. Ultimately it is tenants that are now feeling the pinch with soaring rents.

When was Section 24 introduced?

Section 24 was introduced by prime minister David Cameron and chancellor George Osbourne as part of the 2015 Finance Act.

It was part of a wider set of measures intended to keep home ownership levels high and slow the growth of the private rental sector (PRS). It was hoped that the changes would reduce demand from buy-to-let landlords and help first time buyers get on the property ladder.

The legislation was introduced gradually over four fiscal years between 2017 and 2021. Each year, a quarter more of a landlords’ finance costs was made non-deductible, starting with 25% in 2017-18, before fully coming into effect in 2020/21.

HMRC also phased in the basic rate relief tax reduction at the same time so there is a slight saving grace still that a 20% tax reduction is available based on the lower of;

  • the finance costs (including any brought forward finance costs not used in previous years);
  • the property business profits (after using brought forward losses);
  • and adjusted income (income that exceeds the personal allowance but after losses and reliefs and excluding dividends and savings income).

The tax reduction cannot be used to create a repayment for the landlord.  If the finance costs cannot be used in that particular year, they can be carried forward for use in future years.  Please speak to your tax adviser to ensure that the tax deduction is calculated correctly.

How does Section 24 work?

Prior to 2017, landlords could deduct their entire finance costs from their rental income when calculating taxable income.

Now, this is no longer the case, and landlords are taxed on their property income, prior to any finance costs.

Let us look at an example. Fred is a landlord who owns a rental property

Our landlord, Fred, earns an amount of money, A, from his job every year.

His rental property also gives him an annual income of B, giving him a total income of A+B.

However, he has a mortgage on this property which in turn costs C every year and needs to pay D for maintenance on his property annually.

Prior to 2017, Fred had a total taxable income of A + (B – (C + D)).

Now Section 24 is being fully applied following 2021, Fred’s taxable income will simply be calculated as A + B – D.

There may be a 20% tax reduction available as described above on the lower of the finance costs, property business profits and adjusted total income.

How Section 24 affects landlords

In simple terms, Section 24 increases a landlords’ taxable income, therefore increasing the total amount of tax they pay.

This can be incredibly significant if the additional income moves them into a higher tax band.

Let us look at our example landlord Fred again, but this time with numbers in place.

Note we are using personal allowance and tax band values from the 2022/23 tax year for both examples so as to focus on the difference the financial cost restrictions brought in by Section 24 have made.

For reference, in the 2021/22 tax year, the personal allowance was £12,570, and the basic rate tax band ended at £50,270.

A landlords’ tax example under the old system

This first example calculates our hypothetical landlord Fred’s tax costs under the system that was in place up until 2017.

Say Fred earns £42,000 from his job, and £20,000 from his rental property. His total annual income before deductions is £62,000.

His mortgage costs him £9,000 a year, and he pays £1,000 in maintenance on the property.

Prior to 2017, Fred would calculate his taxable income by subtracting his finance and maintenance costs from his rental income, and then adding this figure to his other income.

(£20,000 (rent) – £9,000 (mortgage interest) – £1,000 (maintenance) = £10,000 rental profit) + £42,000 (from employment) = £52,000 gross income.

Fred will pay zero tax on the first £12,570 of his income as this element falls under his personal tax allowance for 2022/23.

He will then pay 20% tax on £37,699 of his income (£50,270 – £12,571) meaning £7,539.80 tax is payable.

With the Higher Rate Tax rate (40%) starting at £50,271 (2022/23) he will also pay higher rate tax of £692.40 on his balance income of £1,731.00

And so Fred’s final tax bill under the old tax arrangement would look like this:

£52,000 Gross income

Tax Calculation

£12,570 @ 0% as falls under Personal Tax Allowance

£37,699 @ 20% Basic rate tax = £7,539.80

£1,731.00 @ 40% Higher rate tax = £692.40

Total tax payable = £8,232.20

A landlords’ tax example under Section 24

This second example uses Section 24, which has been fully operational since 2021 and removes the right to deduce mortgage finance costs but a 20% basic rate deduction may be available as described above and demonstrated below.

Fred still earns £42,000 from his job and £20,000 from his rental property. For the purposes of this example, we have not taken into account that tax may already have been deducted from employment income.

He still pays £9,000 for his mortgage, and £1,000 in maintenance.

Fred does not have any unused finance costs brought forward.

His taxable income is now calculated by adding his salary to his rental income and taking away ONLY his maintenance costs (as mortgage finance costs are no longer deductible). (£20,000 – £1,000 = £19,000) + £42,000 = £61,000

Fred will still pay zero tax on the first £12,570 of his income as this element falls under his personal tax allowance (2022/23).

He then pays 20% tax on the next £37,699, as this falls in the basic 20% tax band.

Finally, he will also pay 40% tax on the final £10,731 of his income, as it passes into the higher band charged on income over £50,270.

The finance costs (no brought forwards) are lower than property profits and adjusted net income and therefore a 20% tax reduction is available based on the finance costs of £9,000.  This means that there is £1,800 of additional relief to deduct from the total tax payable of £11,832.20

And so Fred’s final tax bill under Section 24 now looks like this:

£61,000 Gross income

Tax Calculation

£12,570 @ 0% as falls under Personal Tax Allowance

£37,699 @ 20% Basic rate tax = £7,539.80

£10,731 @ 40% Higher rate tax = £4,292.40

Total tax payable = £11,832.20

Less relief for finance costs £9,000 @ 20% = £1,800

Final tax payable = £10,032.20

The net result is that Fred now has to pay £1,800 more tax than he would have done prior to the introduction of Section 24. This is despite the fact Fred’s salary and rental income have not changed.

On top of increasing his tax bill relative to what it would have been under the old system, Fred is now in a higher rate tax bracket. This could have a more profound effect as his salary from employment rises in the future.

The introduction of Section 24 can also come with further downsides including potentially having child benefit clawed back under the high-income child benefit charge if income is in excess of £50,000.

These changes have been extremely costly for landlords with only one or two properties, like our example, Fred. This is because landlords in this group are more likely to be pushed into the higher rate tax bracket.

Now with substantially increasing mortgage rates compounding this issue the Telegraph fears some landlords profits could fall to unsustainable levels.

However, there are methods that landlords are using to get around this legislation.

Three alternative routes to Section 24

Putting aside the concerns around the introduction of Section 24 there are three routes landlords are currently going down instead of simply selling a rental house as quickly as possible.

Partner route

One potential method to deal with the tenant tax is to transfer property to a lower income partner. Or at least transfer some or all of the income via a legal Partnership arrangement validated by HMRC.

If a landlord’s spouse or partner pays either basic tax, or no tax at all, then transferring property can substantially reduce the amount of tax payable on rental income.

But you must not do this before seeking advice from an accountant.

Limited company route

Another way of avoiding Section 24 is to transfer your property to a limited company.

This can be advantageous as limited companies are exempt from Section 24 and 100% of mortgage interest can be offset against tax as a business expense.

In addition, the corporation tax rate in the UK is currently 19%. This is a lot lower than the 40% higher band tax rate.

However, this is not the right option for everyone.

It is likely that you will need to pay stamp duty and capital gains tax if you transfer a property to a company. This is unless you are able to claim Incorporation and Stamp Duty Reliefs as a result of being able to prove that you spend around 20 hours per week managing a portfolio of properties. And so if you have just a few buy to let properties this is unlikely to work in the eyes of the Inland Revenue.

In addition, getting the money out of the company leaves you liable to a double tax charge, once via corporation tax and then again when you come to extract the profits personally.

Finally, it can be harder to get a mortgage as a company and more expensive than Buy to Let borrowing in your personal name. Both arrangement fees and the interest pay rates tends to be greate for Limited company mortgages.

An accountant can help you work out if the limited company approach is the most efficient approach for you. This Limited company set up could be a great way of building an investment up over an extended period of time. This is due to inherent tax breaks for limited companies.

Holiday let route

Lots of landlords are now choosing to transfer their private rental property to the holiday home sector.

Furnished holiday lets are an exception to Section 24 of the Finance Act 2015 and are treated as a trading business.

This means that finance costs related to a property in use as a holiday let can be offset against tax.

In addition, holiday lets can have a higher income than a buy to let, though not every property is suitable to be used as a holiday let.

Running a holiday let is substantially more work than owning a traditional buy to let property.

Some lenders have complex restrictions on what you can do with a holiday let and how you market it.

Legally, for a property to be considered a holiday let, it must be available for at least 210 days per year. It must also be let for at least 105 days. In addition, there cannot be periods of longer-term accommodation, meaning more than a month at a time, which add up to more than 155 days.

There is an interesting twist to holiday let properties. If you have multiple mortgaged buy to let properties, it can make sense to secure most of your debt on one kept as a holiday let. This is because you can still offset the finance costs of this against tax.

You should talk to an accountant before converting a property into a holiday let to ensure that it is right for you as there are many tax considerations in doing so.


The tenant tax has substantially reduced the profitability of buy to let property. This is especially the case for landlords who are pushed up into a higher tax bracket. And all of this comes at a time of unprecedented numbers of changes in landlord legislation driving landlords to sell up.

There are a few strategies which can allow you to mitigate some of the extra tax costs of Section 24. However, these are not suitable for everyone and will depend on individual circumstances at any given time.

Some landlords have been left in a situation where their property portfolio is far less profitable than previously. If you are in this situation, it might be best to sell up.

Please note that this blog post is not intended to constitute financial advice and therefore should not be relied upon. Before making any decisions regarding how best to proceed, we would suggest you seek professional advice from a qualified tax adviser.

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