Surviving Section 24: Mortgage Interest Relief and Tax Restructuring

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

How the 20% tax credit flows

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

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.

The hidden HICBC 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.

Form 17 income splitting

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

• 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.

Refinancing onto commercial debt

Commercial mortgages on residential portfolios sit outside the Section 24 restriction in most cases:

• 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.
• Pricing is typically 0.5%-1.5% above BTL rates and stress-testing is more conservative.
• Lender fees, legal costs, valuations and possible early repayment charges add £8,000-£15,000 to the transaction.

The SPV bypass

A property SPV bypasses Section 24 because corporation tax allows full deduction of finance costs. 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.
• Holding period of at least 5-10 more years.
• Profits will be retained inside the company (drawn slowly, not stripped immediately).

Section 162 Incorporation Relief defers the personal CGT on transfer where the activity meets HMRC's "business" test. SDLT usually applies in full unless the partnership-incorporation route is used. The accounting and compliance cost of running an SPV (£1,400-£2,850 per year) is real and recurring.

When selling is the right answer

For some heavily geared higher-rate landlords with single properties, the post-Section 24 net yield no longer justifies the asset:

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 net tax yield to a comparable risk-free or near-risk-free alternative (4-5% in 2026).
4. 4If net yield is below the alternative AND capital growth assumptions are weak, consider sale.

Managing interest rate fluctuations

For heavily geared portfolios, interest rate movements cascade fast through the Section 24 tax position:

• A 1% rise in mortgage rate increases finance costs proportionally.
• Under Section 24, that increase is only partially offset by the 20% credit.
• The effective cost-of-rate-increase is 4x worse for higher-rate landlords than for basic-rate.
• Fixed-rate refinancing locks in known cost and is usually worth 0.3%-0.5% premium over variable for portfolios above 50% LTV.