HMRC Compliance System

BridgePath Section 24 Tax Calculator & Modeler

Instantly evaluate the impact of mortgage finance cost restrictions on your buy-to-let margins.

Educational Guide

Understanding HMRC Section 24 Rules

Learn how finance cost restrictions artificially inflate your taxable income, and discover how incorporating protects your margins.

What is Section 24?

Introduced under the Finance (No. 2) Act 2015, Section 24 completely changed how individual UK landlords deduct mortgage interest. Instead of subtracting financing costs directly from gross rental earnings to find taxable profit, individual landlords must pay income tax on their entire gross rental income (minus allowable operating expenses like maintenance or insurance).

HMRC then issues a basic rate reduction credit valued at $20\%$ of your total finance costs to help offset the burden, calculated as:

$$\text{Tax Credit} = \text{Mortgage Interest Paid} \times 20\%$$

Why are higher-rate taxpayers at risk?

Because gross rents are added directly to your employment salary, Section 24 frequently pushes basic-rate taxpayers ($20\%$) into the higher-rate ($40\%$) or additional-rate ($45\%$) brackets. Even worse, because you are charged tax on phantom "profits" you never pocket, your effective tax rate can easily exceed $50\%$, $100\%$, or even result in running a loss-making portfolio.

When structured correctly as a Limited Company (Ltd Co), Section 24 restrictions do not apply. Corporate entities can subtract $100\%$ of mortgage interest as an allowable business expense before paying Corporation Tax (currently at $19\%$ or $25\%$), saving thousands annually.

Frequently Asked Questions (FAQs)

How does the $20\%$ tax reducer credit work?

Under personal name ownership, you calculate your tax due on your net rental profits before mortgage interest is considered. Once that gross tax is calculated, a credit of $20\%$ of your interest expense is subtracted from your final tax bill. If your tax rate is $40\%$ or $45\%$, you are left with an unmitigated tax exposure of $20\%$ or $25\%$ respectively on your interest payments.

Can I avoid Section 24 by transferring properties to a Limited Company?

Yes, Limited Companies are treated as separate legal entities, meaning $100\%$ of finance interest is deductible as business expenses. However, transferring existing properties can trigger Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). Always model this transition using a qualified CTA or accountant.

What counts as "Allowable Expenses" under personal ownership?

You can still deduct non-finance operational expenses before calculating tax. These include property insurance, letting agency fees, council tax, utilities, cleaning, gardening, and general repairs and maintenance (as long as they are not structural capital improvements).