Section 24 Explained: Why UK Landlords Are Paying Tax on Profits They Never Made

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Once a month, Simon Misiewicz from Optimise Accountants joins us to tackle a UK property tax topic — with one eye always on those of us based overseas.

This month: Section 24.

If you hold UK property in your personal name and you have a mortgage on it, this one directly affects you.

And if you're a higher-rate taxpayer, it may be affecting you far more than you realise.

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Once a month, Simon Misiewicz from Optimise Accountants joins us to tackle a UK property tax topic — with one eye always on those of us based overseas.

This month: Section 24.

If you hold UK property in your personal name and you have a mortgage on it, this one directly affects you.

And if you're a higher-rate taxpayer, it may be affecting you far more than you realise.

What Is Section 24?

Section 24 is the mortgage interest relief cap introduced by the UK government for individual landlords.

Before Section 24, you could deduct your full mortgage interest costs from your rental income before calculating your tax bill.

After Section 24, you can no longer do that.

HMRC now taxes your gross profit — rental income minus expenses like repairs, letting fees, and maintenance — before deducting mortgage interest.

You do receive some relief on your mortgage interest costs, but only at 20%, regardless of the rate of tax you actually pay.

The Numbers: Basic Rate vs Higher Rate Taxpayers

Take a simple example: £100 gross rental profit, £30 mortgage interest.

For a basic rate taxpayer, the impact is relatively modest.

Tax is charged on the £100 at 20% (£20), then you receive 20% relief on the £30 mortgage cost (£6 back), leaving a tax bill of £14.

For a higher rate taxpayer, the picture changes significantly.

Tax is charged on the £100 at 40% (£40), then the same £6 mortgage relief applies, leaving a tax bill of £34.

That is a tax bill of £34 on a net profit — before tax — of just £70.

When It Gets Worse: High-Value Properties

The problem becomes most acute in higher-value areas — London, Surrey, the South — where mortgage interest costs are high relative to rental income.

Simon gives the example of a landlord with £100 gross profit but £70 in mortgage interest costs.

The net profit before tax is £30.

HMRC taxes the gross profit of £100 at 40%, giving a tax bill of £40, then applies £14 relief on the £70 mortgage interest, leaving a net tax bill of £34.

But the landlord only made £30.

They are paying £34 in tax on a £30 profit.

That is a loss-making property — not because the rent is too low, but because of Section 24.

The worst case Simon has seen in practice: a client facing a tax bill of 165% of their real net profit.

In other words, they paid £165 to HMRC for every £100 they actually made.

Who Is Actually Making Money From Your Property?

Simon puts it plainly: if you are in this position, ask yourself who is making money from your property.

In his high-value example, the bank takes £70 and HMRC takes £34.

The landlord is left with a negative return.

The bank and HMRC are the ones benefiting — not you.

The Limited Company Solution

Section 24 does not apply to limited companies.

A limited company can still fully deduct mortgage interest costs against rental income before calculating its tax liability.

This is the primary reason most new UK property investors are now buying through a limited company structure rather than in their personal name.

The Expat Consideration

For those of us based overseas, there is an additional dimension.

If you hold UK property in your personal name, you become the taxable person — wherever in the world you happen to be living.

If you move to a country that taxes worldwide income, your UK rental profits could be taxed there as well as in the UK.

Holding property inside a UK limited company can provide a layer of separation from that risk.

However, limited companies come with their own complication: the risk of being taxed twice — once through corporation tax and again when you draw income.

As Simon and John both stress, there is no one-size-fits-all answer.

The right structure depends entirely on your personal circumstances, where you are based, and where you plan to be in the future.

Key Takeaways

Section 24 taxes gross rental profit, not net profit — mortgage interest is no longer fully deductible for individual landlords.

Basic rate taxpayers are largely unaffected; higher rate taxpayers face a significant additional burden.

In high-value areas with large mortgages, landlords can end up with a negative after-tax return on a property that appears profitable on paper.

The worst case Simon has seen: 165% tax on real profits.

Limited companies are not subject to Section 24 — which is why most portfolio investors are now buying through a corporate structure.

Expats holding property in their personal name may face additional tax exposure in their country of residence.

Always take case-by-case professional advice before changing your ownership structure.

Guest

Simon Misiewicz — Optimise Accountants

Simon specialises in UK property tax for landlords, portfolio investors, and expats.

Link to Optimise Accountants in the episode description.

Not financial or tax advice — always consult a qualified professional for your personal circumstances.