Chapter 9: Section 24 and the New Economics of Leveraged Property
Key point: Historically, landlords could often treat mortgage interest as an ordinary cost of earning rent. Section 24 altered that position for many individual landlords. As a result, a taxpayer may finish the year with little cash profit while still being assessed on an inflated measure of income.
Among many investors, residential property has long been regarded as one of the safest ways to build wealth. The familiar model has been straightforward: rent covers the mortgage interest, a modest monthly surplus is retained, and capital growth is expected over time.
Before 2017, that approach could often operate on commercially intelligible terms. Following the introduction of Section 24, the position for many personally held, mortgaged rental properties became materially less favourable.
Section 1: What Section 24 Actually Does
Consider a simple example.
Mr Wang has a salary of £45,000. He also owns a rental property that generates:
- rent: £20,000
- mortgage interest: £15,000
- other running costs: £2,000
Economically, his real cash profit is:
Cash profit: £20,000 - £15,000 - £2,000 = £3,000
On an economic basis, that appears straightforward. The property has produced £3,000 of real cash profit, and the taxpayer might therefore expect the tax position to follow that commercial outcome.
Under the Section 24 regime, however, the calculation does not begin there.
Step One: HMRC Inflates the Apparent Profit
HMRC no longer lets him deduct the £15,000 mortgage interest in the old direct way. So the property profit in its computation becomes:
HMRC profit figure: £20,000 - £2,000 = £18,000
Step Two: The Inflated Figure Pushes Him Into Higher-Rate Tax
His salary is £45,000. Add the notional rental profit of £18,000, and HMRC sees total income of £63,000. Now part of that total sits in the 40% band.
Step Three: Tax Is Calculated on the Inflated Figure First
Roughly speaking, the rental profit triggers a tax bill of over £6,000 before relief for finance costs.
Step Four: HMRC Gives a Basic-Rate Tax Reducer
It then gives a 20% tax credit on the mortgage interest:
Tax reducer: £15,000 × 20% = £3,000
So after the reducer, the final tax bill linked to the property can still be around £3,146 in the original example.
That is the central difficulty created by Section 24. The property has generated only £3,000 of cash profit, yet the tax bill may exceed that amount. In practical terms, the landlord may need to subsidise the tax from salary or savings.
Section 2: The Collateral Damage of Section 24
The immediate tax bill is only part of the problem. Because Section 24 inflates Adjusted Net Income, it can also distort the wider tax position of the household and trigger further consequences:
- the High Income Child Benefit Charge (HICBC).
- Loss of Personal Allowance if total income goes above £100,000.
- Entry into the effective 60% marginal tax zone.
In other words, the landlord is not just paying more tax on the property itself. The inflated income figure can also destroy benefits and allowances elsewhere in the household tax picture.
Section 3: How People Try to Defend Themselves
Section 24 materially altered the economics of leveraged residential investment in the UK. For those who still wish to pursue that strategy, only a limited number of serious defensive approaches remain.
Approach One: Use an SPV Limited Company
This is the route many landlords have adopted in recent years. Section 24 targets individual landlords, not companies in the same way. If an SPV company receives £20,000 rent and pays £15,000 interest, the finance cost can generally still be treated much more naturally within company tax rules. That can leave a true taxable profit closer to £3,000, taxed at Corporation Tax rates instead of being distorted into a personal higher-rate problem.
A very important warning: if you already own several properties personally, do not casually transfer them into your company. That can trigger Capital Gains Tax and Stamp Duty consequences because the transfer is treated as a disposal and acquisition for tax purposes.
Approach Two: Shift Rental Income to a Lower-Income Spouse
If the property is jointly owned and one spouse is in a lower tax bracket, legal restructuring through a Declaration of Trust and, where relevant, Form 17 can shift rental income away from the high-rate spouse. That does not eliminate Section 24, but it can reduce the damage by making sure the inflated income sits with the spouse taxed at lower rates.
Conclusion
UK property investment can no longer be evaluated on assumptions that were reasonable a decade ago. With higher interest rates and Section 24 fully in force, acquiring mortgaged rental property personally and without structural planning may lead not to efficient wealth accumulation, but to tax liabilities that bear little relation to economic reality.