Buy-to-Let Mortgages: Tax Rules After Section 24
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The Section 24 reforms (phased in 2017–2020) changed UK buy-to-let economics dramatically. Many landlords now pay more tax than they realized. Here’s the 2026 reality.
What Section 24 Changed
Pre-2017: Mortgage interest was a deductible business expense. Landlords paid tax only on net rental profit.
Post-2020 (current): Mortgage interest is no longer deducted from rental income. Instead, you receive a 20% tax credit on the interest amount.
For higher-rate taxpayers, this is a real tax increase.
The Math That Bites
Example: £200,000 BTL property, £180,000 interest-only mortgage at 6%
Annual mortgage interest: £10,800 Annual rent: £20,000
Pre-Section 24 (old way):
- Net rental profit: £20,000 – £10,800 – £2,000 (expenses) = £7,200
- Tax @ 40%: £2,880
Post-Section 24 (current):
- Taxable rental income: £20,000 – £2,000 = £18,000 (interest not deducted)
- Tax @ 40%: £7,200
- Less 20% interest credit on £10,800 = £2,160
- Final tax: £5,040
Difference: £5,040 – £2,880 = £2,160 more tax per year
Why Many Landlords Don’t Realize
The tax bill comes through self-assessment, often months after the rental income was earned. Many landlords don’t track this carefully and are surprised.
Limited Company Structure
Section 24 applies to personal landlords, not limited companies. Companies can still deduct interest fully.
Limited company benefits:
- Full interest deduction
- Corporation tax rate (currently 25%) instead of personal rates up to 45%
- Profits taxed once unless extracted as dividends
- Easier to scale portfolio
Limited company costs:
- Higher mortgage rates (BTL company products)
- Annual filing requirements
- Cannot benefit from Capital Gains Tax allowance (£3,000 in 2026)
- Stamp duty on transferring existing properties
Should You Incorporate?
Run the numbers if:
- You have 4+ BTL properties
- You’re a higher or additional-rate taxpayer
- You plan to grow portfolio further
Probably don’t bother if:
- You have 1–2 BTL properties
- You’re a basic-rate taxpayer
- You plan to sell or retire soon
Other Tax Rules to Know
Wear and Tear Allowance: Abolished You can only deduct actual replacement costs of furnishings (£0.0 standard allowance now).
Mortgage Interest Cap on Holiday Lets Furnished holiday lets get treated differently — still allowed full deduction in some cases.
Capital Gains:
- BTL profits taxed at 18% (basic-rate band) or 24% (higher-rate)
- CGT annual allowance only £3,000 in 2026
- Plan disposal year carefully
Inheritance Tax: BTL properties form part of your estate; no special relief.
Cash Flow Implications
Many BTL landlords in 2026 find:
- Mortgage rates 5.5–7%
- Section 24 tax cost
- Rent capped by tenant affordability
- Net cash flow: 0% or negative
The “BTL gold rush” is over. Investment now relies more on capital growth than cash flow.
When BTL Still Works in 2026
- Mortgage-free purchases (no Section 24 impact)
- Lower-LTV (40-60% LVR) properties
- Higher-yield regional markets
- Limited company structure for portfolio investors
- Strong capital growth markets
When to Reconsider
If you have 1–2 BTL properties on high LTV:
- Calculate true after-tax yield
- Compare to alternatives (REITs, dividend stocks, index funds)
- Consider whether equity recycled into ISAs would outperform
Tactical Considerations
- Mortgage interest restriction date: Make sure you’re tracking accurately
- Allowable expenses: Repairs, agent fees, insurance, gas safety, ground rent
- Disallowed: Improvements (capital), mortgage interest (now only 20% credit)
- Records: Keep all receipts for 6 years minimum
A 2026 Decision Framework
Should you keep your existing BTL?
- What’s the gross yield? Below 5% = consider selling
- What’s your after-tax yield? Below 2% = consider selling
- What’s the capital growth outlook? Strong = keep, weak = sell
- What’s the alternative use of capital? Better risk-adjusted returns elsewhere?
⚠️ Reality Check: BTL is no longer easy money. Run real numbers, including Section 24, before holding or buying.
