UK Property Investor Tax Changes: Section 24 and Limited Company Strategies

Navigate mortgage interest restrictions and decide if incorporation is right for you

The Hidden Tax Trap: A landlord with £100,000 rental income and £60,000 mortgage interest used to pay tax on £40,000 profit. Now they pay tax on £100,000, with only a basic rate credit for the interest. For higher-rate taxpayers, this change can mean paying tax on money they never actually received. Some landlords are now paying effective tax rates exceeding 100% of their real profit.

The Problem: Section 24 Changes Everything

Section 24 of the Finance (No. 2) Act 2015 introduced the most significant change to buy-to-let taxation in decades. Fully phased in since April 2020, it fundamentally alters how mortgage interest is treated for individual landlords.

The Old Rules (Pre-April 2017)

Mortgage interest was a deductible expense. You subtracted it from your rental income to calculate your taxable profit, just like any other business expense.

Old System Example:

  • Rental income: £30,000
  • Mortgage interest: £15,000
  • Other expenses: £5,000
  • Taxable profit: £10,000
  • Tax at 40% (higher rate): £4,000

The New Rules (From April 2020)

Mortgage interest is no longer deductible. Instead, you receive a tax credit at the basic rate (20%) on your interest payments. This sounds similar but creates dramatically different outcomes for anyone paying tax above the basic rate.

New System Example (Same Landlord):

  • Rental income: £30,000
  • Other expenses: £5,000
  • Taxable profit: £25,000
  • Tax at 40% (higher rate): £10,000
  • Less: 20% credit on £15,000 interest: -£3,000
  • Net tax: £7,000

The same landlord now pays £3,000 more tax on identical cash flows.

The Bracket Creep Problem

Even worse, the inflated "profit" figure can push you into a higher tax bracket. A landlord who was a basic-rate taxpayer under the old rules might now appear to be a higher-rate taxpayer, despite their actual disposable income remaining unchanged.

Bracket Creep Example:

A part-time employee earning £35,000 with rental "profit" (before Section 24) of £15,000:

  • Under old rules: Total taxable income £50,000, staying within basic rate band
  • Under new rules: Taxable income £65,000 (£35,000 + £30,000 gross rent - expenses), pushed into higher rate band
  • Impact: Some income now taxed at 40% instead of 20%

Why This Matters: The Compounding Effects

Section 24 does not operate in isolation. Its effects compound with other aspects of the tax system:

Child Benefit Clawback

The High Income Child Benefit Charge kicks in at £60,000 adjusted net income. Section 24's inflated profit figure counts toward this threshold, meaning landlords can lose Child Benefit entitlement due to "phantom" income.

Personal Allowance Erosion

The personal allowance reduces by £1 for every £2 earned above £100,000. Landlords with high mortgage interest may see their allowance eroded based on income they never actually received.

Student Loan Repayments

Plan 2 student loans require repayment at 9% of income above £27,295. The Section 24 "profit" figure increases repayments, even though actual cash available to the landlord has not changed.

Upcoming Property Income Surcharge

From April 2027, the government plans to introduce a 2% surcharge on property income. This will add basic rate of 22%, higher rate of 42%, and additional rate of 47% on rental profits, making the situation even more challenging.

The Solution Framework: Strategic Options for Landlords

Section 24 cannot be avoided for individual ownership, but landlords have several strategic options to consider:

Option 1: Limited Company Ownership

Companies can still deduct mortgage interest as an expense. Corporation tax at 25% (or 19% for profits under £50,000) often produces a lower tax burden than individual ownership at higher rates.

Company Ownership Example:

  • Rental income: £30,000
  • Mortgage interest: £15,000
  • Other expenses: £5,000
  • Taxable profit: £10,000
  • Corporation tax at 19%: £1,900

Compared to £7,000 as an individual, the company saves £5,100 annually.

But there are catches:

  • Transferring existing properties to a company triggers Stamp Duty Land Tax (usually 3-5% of property value)
  • Capital Gains Tax applies on the transfer at market value
  • Mortgage lenders may require remortgaging on commercial terms with higher rates
  • Extracting profits from the company incurs dividend tax
  • Annual filing requirements and accountancy costs are higher

Option 2: Reduce Leverage

The simplest solution is to reduce mortgage debt. Less interest means less impact from Section 24. This might involve:

  • Overpaying mortgages where possible
  • Using savings to pay down debt
  • Selling properties with high LTV to reduce portfolio leverage

The trade-off? Lower returns on equity and slower portfolio growth.

Option 3: Transfer Ownership to a Lower-Earning Spouse

If one spouse is a basic-rate taxpayer and the other is higher-rate, transferring beneficial ownership can reduce the Section 24 impact. But:

  • The transfer may need to be genuine and complete
  • The property income split must reflect actual ownership
  • Mortgage lenders must consent if there is a mortgage
  • CGT implications need consideration

Option 4: Furnished Holiday Lettings (While Available)

FHLs are treated as businesses and have been exempt from Section 24. However, the government has announced these favourable rules will end from April 2025, so this option is closing.

Step-by-Step: Should You Incorporate?

The decision to transfer properties to a limited company is complex. Here is how to evaluate it properly:

Step 1: Calculate Your Current Tax Position

Work out exactly how much tax you pay as an individual landlord, including the Section 24 impact. Include any Child Benefit charges, allowance erosion, and student loan effects.

Step 2: Calculate the Transfer Costs

  • SDLT: 3-5% on market value of properties
  • CGT: 24% (or 18% for basic rate) on gains since purchase
  • Legal fees: For transfer documentation
  • Mortgage costs: Potential early repayment charges, new arrangement fees, higher interest rates on commercial mortgages

Step 3: Calculate Ongoing Company Tax

Model your annual tax bill as a company, including corporation tax on profits and dividend tax when extracting funds. Remember to include:

  • Accountancy fees (typically £500-£1,500 per year)
  • Companies House filing fees
  • Potentially higher mortgage interest rates

Step 4: Calculate the Breakeven Point

How many years of tax savings does it take to recover the transfer costs? If your breakeven is 15+ years, incorporation may not be worthwhile unless you are committed to long-term holding.

Example Breakeven Calculation:

  • Property value: £300,000
  • SDLT at 5%: £15,000
  • CGT on £100,000 gain at 24%: £24,000
  • Legal and refinancing costs: £3,000
  • Total transfer cost: £42,000
  • Annual tax saving: £5,100
  • Breakeven: 8.2 years (before considering higher mortgage rates)

Step 5: Consider Your Exit Strategy

How do you plan to exit your property investments? Selling from a company has different CGT treatment than individual sales. If you plan to pass properties to children, the inheritance tax implications also differ.

How TaxBot Helps Property Investors

  • Section 24 Calculator: Model your exact tax position under current rules, showing the impact of mortgage interest restrictions
  • Incorporation Analysis: Compare individual vs company ownership with our detailed modelling tool
  • Property Portfolio Tracker: Track income, expenses, and mortgage interest across multiple properties
  • Tax Projection: See your estimated tax liability throughout the year, including Section 24 effects
  • Expense Categorisation: Ensure all allowable expenses are captured and correctly categorised
  • Compliance Alerts: Reminders for payment on account dates and Self-Assessment deadlines
  • CGT Calculator: Model capital gains scenarios for property disposals

Success Metrics: Measuring Your Strategy

Whether you incorporate or optimise your individual position, track these metrics:

  • Effective tax rate: Total tax paid divided by cash profit (rent minus actual expenses). If this exceeds 50%, urgent action is needed
  • Return on equity: Are your tax-adjusted returns still competitive with other investments?
  • Cash flow coverage: After tax, can your rental income still cover mortgages with a comfortable margin?
  • Net worth growth: Is your property portfolio still building long-term wealth effectively?

Property remains a valuable asset class, but the tax environment has changed fundamentally. Landlords who adapt their strategies will continue to prosper; those who ignore Section 24 may find their returns eroded to the point where property investment no longer makes sense.

Take Control of Your Property Tax Position

Section 24 has reshaped the buy-to-let landscape, but it has not eliminated the opportunity for property investment to be profitable. The key is understanding your numbers, modelling your options, and making informed decisions about structure and leverage.

Do not guess whether incorporation is right for you. Do not ignore the impact of Section 24 hoping it will go away. And do not make major decisions without proper analysis.

Use TaxBot's property investor tools to model your exact situation, compare strategies, and find the approach that maximises your after-tax returns. Your future self, and your portfolio, will thank you.