, Property
A landlord with £30,000 of rent and £18,000 of mortgage interest used to declare a £12,000 profit. Now they declare £30,000 of income, pay tax on it, and get a credit worth 20% of the interest. If they are a higher rate taxpayer, the same property produces the same cash and a materially larger tax bill. If the extra £18,000 of declared income pushes them across a threshold, it costs more again, and the extra cost has nothing to do with the property.
That is section 24, and it is the reason a generation of landlords moved into companies.
The rule taxes turnover, not profit
Section 24 of the Finance (No. 2) Act 2015 restricted the deduction of finance costs for individual landlords of residential property. It was phased in from the 2017 to 2018 tax year and has applied in full since 2020 to 2021.
Finance costs, which means mortgage interest, interest on loans to buy furnishings, and arrangement and broker fees, are no longer deductible from rental income. Instead you get a basic rate tax reducer worth 20% of the lower of the finance costs, the property profits, or your adjusted total income above the personal allowance.
For a basic rate taxpayer the effect is close to neutral, since 20% relief is what they had. For a higher rate taxpayer paying 40%, half the relief has gone. For an additional rate taxpayer, more than half.
The second effect is the one that does the real damage. Your taxable income now includes the gross rent rather than the net. That inflated figure interacts with every threshold in the system: the point at which higher rate tax begins, the withdrawal of the personal allowance above £100,000 at a rate of £1 for every £2 of income, the High Income Child Benefit Charge, and the tapering of the pension annual allowance. A landlord who was comfortably a basic rate taxpayer on real profits can become a higher rate taxpayer on paper income, which raises the tax on their salary as well.
It applies to residential property only. Commercial property, and furnished holiday lettings while that regime existed, were outside it. It does not apply to companies.
The arithmetic on a single flat
Take a flat let at £1,200 a month, so £14,400 a year. Mortgage interest of £8,000. Other allowable costs, meaning agent fees, insurance, repairs, safety certificates and the like, of £2,400.
On the old basis, taxable profit was £4,000. A 40% taxpayer paid £1,600, leaving £2,400 of the £4,000 cash.
On the current basis, taxable profit is £12,000. Tax at 40% is £4,800, less a tax reducer of 20% of £8,000, which is £1,600. Tax payable is £3,200. The cash profit is still £4,000, so the landlord keeps £800.
The effective rate on real profit has gone from 40% to 80%. Push the interest higher relative to the rent and the effective rate passes 100%, which is the situation highly geared landlords found themselves in when rates rose from the very low levels of the 2010s. This is why section 24 is a gearing problem as much as a tax problem: it is harmless at low leverage and brutal at high leverage.
Companies are taxed differently, which is not the same as taxed less
A company letting residential property deducts its interest as a business expense in the ordinary way. It pays corporation tax on the profit: currently 19% on profits up to £50,000, 25% above £250,000, with marginal relief between those figures. Those rates are set in Finance Acts and are reviewed, so check the position for the year in question.
The tax saving is real. It is not the whole picture, because the money is in the company and getting it out is a second tax event. Dividends are paid from post-corporation-tax profit and taxed on the shareholder at the dividend rates, currently 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate, with a dividend allowance that has been repeatedly reduced. A salary is deductible for the company but attracts income tax and National Insurance. Combined, the total tax on profits fully extracted can approach or exceed what an individual would have paid.
The model works properly for landlords who are reinvesting rather than spending. Retained profits in a company are taxed once, at corporation tax rates, and can be redeployed as deposits. A landlord building a portfolio benefits. A landlord drawing everything out to live on often does not.
The costs of running a company also need honest pricing:
- Company accounts and a corporation tax return every year, plus your own self assessment, so two sets of fees.
- Confirmation statement and filing obligations at Companies House, and accounts on the public record.
- Buy-to-let mortgages for companies are available from a narrower set of lenders, generally at higher rates and with arrangement fees, and almost always requiring personal guarantees from the directors.
- The Annual Tax on Enveloped Dwellings, where a company holds a single residential dwelling worth more than £500,000, unless a relief such as the property rental business relief applies. The relief usually applies to a genuine letting business, but you still have to file a return to claim it.
Moving an existing portfolio is the expensive part
Transferring property you already own into your own company is a disposal at market value between connected persons. That triggers capital gains tax on the gain, at the residential property rates, whether or not any cash changes hands. The company is a separate buyer, so stamp duty land tax is payable on the market value, including the higher rates surcharge for additional dwellings, which was increased to 5% from the end of October 2024. In Scotland and Wales, the equivalent devolved taxes apply with their own surcharges.
Incorporation relief under section 162 of the Taxation of Chargeable Gains Act 1992 can defer the capital gain where a genuine business, rather than a passive investment, is transferred as a going concern in exchange for shares. Whether a lettings operation amounts to a business is a question of fact about the degree of activity, and HMRC scrutinises the claim. It does not relieve the stamp duty at all, except in the specific case of a transfer from a partnership, where the calculation can produce a much smaller charge. Those arrangements need to be real partnerships with a history, not a form completed the week before.
For most established landlords with mortgaged property and significant gains, the entry cost of incorporating exceeds several years of the tax saving. For someone buying their next property, starting in a company costs almost nothing extra. That is why the sensible answer is so often "not the existing ones, yes the next ones", and why anybody telling you incorporation is always right is selling something.
Where this shows up in the game
Letting property is part of the Property & Construction Track, an add-on to the full game in Business Baron. The game carries real headline UK tax rules for every year from 1930/31, so the tax on a rental business depends on the year you have reached as well as on how you hold it. Choosing between your own name and a company is cheapest at the beginning, which is when you know the least.