Surviving Section 24: Mortgage Interest Relief and Tax Strategies

Section 24 of the Finance (No. 2) Act 2015 phased out the deduction of finance costs against rental profit and replaced it with a 20% basic-rate tax credit. The transition completed in April 2020. Six years on, the practical impact on portfolio landlords is well understood: higher-rate landlords with geared portfolios pay tax on revenue they never received as profit, and the higher the leverage, the worse the bite.

For most Harrow landlords the question in 2026 is not whether Section 24 is unfair (it is and the law has not changed). The question is which of three structural responses applies: income splitting via Form 17, refinancing onto cheaper or commercial debt, or selective incorporation into an SPV.

How the 20% tax credit actually flows

Pre-Section 24, a higher-rate landlord paid 40% tax on rental profit after deducting mortgage interest. Post-Section 24, the calculation changes:

1. 1Calculate gross rental income.
2. 2Deduct allowable expenses except finance costs.
3. 3Apply income tax at the marginal rate (20%, 40% or 45%) on the higher pre-finance-costs profit.
4. 4Reduce the tax bill by 20% of the lower of: (a) finance costs, (b) rental profit, (c) adjusted total income above the personal allowance.

In this example, Section 24 doubles the tax bill on identical economic profit. For a landlord with a £600,000 mortgage at 5.5%, the tax delta in a single property runs into mid-four-figures every year.

Income splitting via Form 17

For married couples and civil partners, the simplest first response is moving rental income onto the lower-earning spouse. The mechanics:

• Default treatment: jointly owned property income splits 50/50 regardless of legal title.
• Form 17 lets a couple declare unequal beneficial ownership (e.g., 1%/99%) so income follows the deed.
• The split must reflect actual beneficial ownership, supported by a deed of trust or declaration of trust.
• Form 17 is not retrospective and only applies from the date of submission.

Where one spouse is non-earning or basic-rate, an income shift can drop a meaningful chunk of rental profit out of the higher-rate band entirely. For a £40,000 rental profit moved from a 40% spouse to a basic-rate spouse, the annual saving is £8,000 of income tax before considering Section 24 itself.

The hidden High-Income Child Benefit Charge interaction

Section 24 inflates a landlord's adjusted net income because rental profit is computed before the finance costs deduction. For couples receiving Child Benefit:

• The High-Income Child Benefit Charge tapers between £60,000 and £80,000 of adjusted net income (post-2024 thresholds).
• Rental profit pre-Section 24 used to flow into adjusted net income at the lower (post-interest) figure.
• Post-Section 24, the higher pre-interest profit pulls landlords into the HICBC zone they previously avoided.
• The charge is recovered through the higher earner's Self-Assessment return, often as an unwelcome surprise.

Restructuring onto commercial debt

Commercial mortgages on residential portfolios sit outside the Section 24 restriction in most cases because they are not Buy-to-Let products. Practical implications:

• Portfolio landlords with four or more properties can refinance onto a single commercial facility against the portfolio as a whole.
• Interest on commercial debt remains fully deductible against rental profit (subject to wholly-and-exclusively).
• Pricing is typically 0.5%-1.5% above BTL rates and stress-testing is more conservative.
• The transaction itself is not free: lender fees, legal costs, valuations and possible early repayment charges on existing mortgages add up.

When SPV incorporation pays

A property SPV (Special Purpose Vehicle, a limited company holding rental property) bypasses Section 24 because corporation tax allows full deduction of finance costs against rental profit. The maths usually start to favour incorporation when:

• The landlord is a higher- or additional-rate taxpayer.
• Total mortgage interest exceeds 50% of net rental profit.
• The portfolio is held for at least 5-10 more years (long enough to recoup transaction costs).
• Profits will be retained inside the company (drawn as dividends slowly, not stripped immediately).

Section 162 Incorporation Relief can defer the personal CGT on transfer where the activity meets HMRC's "business" test (typically 15+ hours per week of active management). Stamp Duty Land Tax usually applies in full on transfer unless the multiple-dwellings or partnership reliefs apply. The accounting and compliance cost of running an SPV (£800-£1,800 per year for an active portfolio) is real and recurring.

When selling is the right answer

For some heavily geared higher-rate landlords with single properties, the honest answer is that the post-Section 24 net yield no longer justifies the asset. A quick sense-check:

1. 1Compute net cash yield: rent minus all expenses including mortgage interest.
2. 2Compute net tax yield: cash yield minus tax under Section 24.
3. 3Compare the net tax yield to the after-tax return on a comparable risk-free or near-risk-free alternative (typically 4-5% in 2026).
4. 4If net yield is below the alternative AND capital growth assumptions are weak, consider sale.