What changed in 2017-2020
Before April 2017, UK landlords holding property in personal names could deduct 100% of their mortgage interest as a business expense against rental income. The remaining profit was taxed at the landlord's marginal income tax rate (20%, 40% or 45%). This treatment matched how almost every other business deducts borrowing costs.
Section 24 of the Finance (No. 2) Act 2015 changed this. The deduction was phased out over four tax years and replaced with a flat 20% basic-rate tax credit on mortgage interest:
- 2017/18: 75% of interest deductible, 25% replaced by the credit
- 2018/19: 50% / 50%
- 2019/20: 25% / 75%
- 2020/21 onwards: 0% deductible — full 20% credit
The change applies only to residential let property held by individuals or partnerships. It does not apply to:
- Furnished Holiday Lets (FHLs) — though FHL rules themselves have tightened in 2024-2025
- Commercial property
- Property held inside a limited company (the entire reason for the SPV shift)
Who Section 24 hits hardest
Three groups of landlords feel Section 24 most acutely:
- Higher-rate (40%) and additional-rate (45%) taxpayers. They were getting 40% or 45% relief on mortgage interest before. Now they get 20%. The effective tax rate on their rental income rises sharply.
- Highly-geared landlords. The more of your rental income is going on mortgage interest, the bigger the relative hit. Landlords with LTV in the 70-80% range took the heaviest impact.
- Basic-rate taxpayers pushed into higher-rate by the rule itself. Because mortgage interest no longer reduces taxable rental income, the gross rental income (before mortgage costs) is what counts for tax-band purposes. Landlords whose net income was previously below £50,270 found themselves crossing the higher-rate threshold on paper, even though their actual cash position hadn't changed.
Basic-rate taxpayers without other complications saw no change — they were getting 20% relief before and still do.
Worked example: £100k personal income, £20k rental
Consider a landlord with £100,000 salary and a £20,000/year rental property with £12,000/year mortgage interest cost.
Pre-Section 24 (e.g. 2016/17):
- Taxable rental profit = £20,000 - £12,000 = £8,000
- Tax on rental at higher rate (40%) = £3,200
- Net rental cash kept = £8,000 - £3,200 = £4,800
Post-Section 24 (2020/21 onwards):
- Taxable rental income (no mortgage deduction) = £20,000
- Tax on £20,000 at higher rate (40%) = £8,000
- 20% basic-rate credit on £12,000 interest = £2,400 reduction in tax owed
- Net tax = £8,000 - £2,400 = £5,600
- Net rental cash kept = £20,000 - £12,000 mortgage interest - £5,600 tax = £2,400
The same property now leaves the landlord £2,400 worse off per year — a 50% reduction in net rental cash flow. Multiply across a portfolio of properties and the cumulative impact becomes material very quickly.
Why the limited-company route fixes the Section 24 problem
Section 24 only applies to property held by individuals or partnerships. Property held inside a UK limited company is taxed under different rules:
- Rental income is corporation tax income, taxed at 19% (small profits rate, up to £50k profit) or 25% (main rate, above £250k profit), with marginal relief in between.
- Mortgage interest is a fully deductible business expense against rental income — no Section 24 restriction.
- Profits stay inside the company until you take them out as dividends, at which point you pay dividend tax personally (8.75% / 33.75% / 39.35% by income band).
Re-running the worked example through a Ltd-company SPV:
- Rental income = £20,000
- Less mortgage interest = £12,000
- Less other allowable expenses (say £1,000) = £7,000 taxable profit
- Corporation tax at 19% = £1,330
- Net profit retained in company = £5,670
If the landlord doesn't immediately need the cash personally, they can leave it in the SPV to fund the next deposit. If they do withdraw it as a dividend in the higher-rate band, they'd pay 33.75% on the dividend (after the £500 dividend allowance), which would net to roughly £3,650. Still meaningfully better than £2,400 personal-name, and the option to defer extraction is the bigger long-term win.
Should an existing personal-name landlord incorporate?
The standard incorporation move — transferring existing personal-name properties into a Ltd company — triggers two costs:
- CGT on disposal. Transferring property from personal name to your own Ltd is treated as a sale at market value. If the properties have gone up in value since purchase, you owe CGT on the gain (24% residential property rate for higher-rate taxpayers as of 2025/26, down from 28% pre-October 2024).
- SDLT on acquisition. The Ltd company is "buying" the properties from you, which triggers full SDLT including the 5% additional-property surcharge.
For an established portfolio with significant capital gains, those two costs together can be 25-35% of the portfolio value. Whether incorporation makes sense depends on:
- How much of the portfolio's gain has been crystallised already
- Whether you qualify for incorporation relief (Section 162 TCGA) — usually requires the portfolio to be a "business" rather than passive investment, which has been tested case-by-case
- Your expected holding period — incorporation only pays back over a long horizon
- Your future acquisition plans — Ltd-company-first is much simpler for new purchases than incorporating later
For most established landlords, the smarter move is to leave existing properties personal and buy future properties via SPV. For new entrants — landlords yet to buy their first investment property in 2025/26 — going SPV from day one is almost always the right call if you're a higher-rate taxpayer.