Quick Summary
- Section 24 restricts mortgage interest relief to a 20% basic rate tax credit — regardless of your actual marginal rate
- Scottish Higher-rate landlords (42%) lose 22% of their mortgage interest to the gap between their rate and the 20% credit — that's £3,300/year on £15,000 of interest
- At Advanced (45%) the loss is £3,750; at Top (48%) it's £4,200 — the worst effective rates in the UK
- The main escape routes: incorporate into a limited company, overpay the mortgage, or sacrifice salary to reduce your marginal rate
Section 24 of the Finance Act 2015 phased out full mortgage interest deductions for residential landlords between 2017 and 2020. It was designed to cool the buy-to-let market. In Scotland, where marginal rates are higher than England at every band above Basic, the impact is disproportionately severe.
Quick Answer: Before Section 24, landlords deducted mortgage interest from rental income before tax — at their marginal rate. Now, mortgage interest is not deductible. Instead, you get a 20% tax credit. If you're a Scottish Higher-rate taxpayer (42%), you pay 42% tax on the full rental income but only reclaim 20% of the interest — an effective extra tax of 22% × your mortgage interest. On £15,000 of annual interest, that's £3,300 of extra tax a Scottish landlord pays compared to the pre-2017 rules. Use our Buy-to-Let Calculator to model the exact impact.
How Section 24 works
Before Section 24 (pre-2017)
Rental income: £30,000 Mortgage interest: £15,000 Taxable profit: £15,000 (interest fully deducted) Tax at 42% Higher rate: £6,300
After Section 24 (now)
Rental income: £30,000 Mortgage interest: £15,000 (NOT deductible) Taxable profit: £30,000 (full rent, no interest deduction) Tax at 42%: £12,600 Less 20% tax credit: £15,000 × 20% = -£3,000 Tax payable: £9,600
Extra tax under Section 24: £3,300/year
That's a 52% increase in your tax bill — purely from Section 24. And it gets worse at higher Scottish bands.
The Scottish penalty at each band
| Scottish band | Rate | Tax on £30k rent | 20% credit on £15k interest | Net tax | Extra vs pre-S24 |
|---|---|---|---|---|---|
| Basic (20%) | 20% | £6,000 | -£3,000 | £3,000 | £0 (no penalty) |
| Intermediate (21%) | 21% | £6,300 | -£3,000 | £3,300 | £150 |
| Higher (42%) | 42% | £12,600 | -£3,000 | £9,600 | £3,300 |
| Advanced (45%) | 45% | £13,500 | -£3,000 | £10,500 | £3,750 |
| Top (48%) | 48% | £14,400 | -£3,000 | £11,400 | £4,200 |
In England at 40% Higher rate, the extra tax would be £3,000 — Scotland's 42% costs an additional £300/year per £15,000 of interest.
The formula is simple: Extra tax = (Your marginal rate - 20%) × mortgage interest.
Worked example: typical Scottish landlord
David, Glasgow:
- Salary: £55,000 (Scottish Higher rate: 42%)
- Rental income: £18,000 (one buy-to-let flat)
- Mortgage interest: £9,000/year (£200,000 mortgage at 4.5%)
- Other expenses: £3,000 (insurance, repairs, management)
Without Section 24 (hypothetical):
- Taxable rental profit: £18,000 - £9,000 - £3,000 = £6,000
- Tax on £6,000 at 42%: £2,520
- Total property tax bill: £2,520
With Section 24 (reality):
- Taxable rental profit: £18,000 - £3,000 = £15,000 (no interest deduction)
- Tax on £15,000 at 42%: £6,300
- Less 20% credit on £9,000 interest: -£1,800
- Total property tax bill: £4,500
- Section 24 costs David £1,980/year extra
At a 4.5% mortgage rate, David's rental yield after tax and mortgage is now marginal. If rates rose to 6%, he'd be making a loss on a cash-flow basis — even though the property shows a "profit" for tax purposes.
The phantom profit problem
Section 24 creates situations where landlords owe tax on "profits" that don't exist in cash terms.
Extreme example:
- Rental income: £20,000
- Mortgage interest: £18,000
- Other expenses: £1,500
- Cash profit: £500
Tax position:
- Taxable profit: £20,000 - £1,500 = £18,500 (mortgage interest not deductible)
- Tax at 42%: £7,770
- Less 20% credit: £18,000 × 20% = -£3,600
- Tax due: £4,170
The landlord has £500 of actual cash profit but owes £4,170 in tax. They're losing £3,670/year on a property that HMRC says is profitable.
This scenario is increasingly common with higher mortgage rates. Many Scottish landlords are trapped — unable to sell without crystallising a capital gain, but losing money annually to Section 24.
Escape routes
1. Incorporate into a limited company
A limited company pays corporation tax (19–25%) on profits, and mortgage interest IS fully deductible against company profits. No Section 24.
The maths:
- Same rental income: £18,000
- Mortgage interest: £9,000 (fully deductible by company)
- Other expenses: £3,000
- Company profit: £6,000
- Corporation tax at 19%: £1,140
Saving vs personal ownership at 42%: £4,500 - £1,140 = £3,360/year
The catch: Transferring existing properties from personal ownership to a company triggers:
- LBTT on the transfer (as if you're buying the property)
- ADS of 8% if it's an additional dwelling
- CGT on any gain since you bought it
- Stamp duty on the mortgage (potentially)
These upfront costs can be £20,000–£50,000+ per property. The payback period is typically 5–10 years.
Best for: New purchases. Buy through a limited company from the start if you're a Higher-rate taxpayer.
2. Overpay the mortgage
Less mortgage = less Section 24 penalty. If David overpays £50,000 off his mortgage:
- Interest drops from £9,000 to £6,750
- Section 24 penalty drops from £1,980 to ��1,485
- Saving: £495/year (a 1% effective return on the overpayment — tax-free)
At Scottish Higher rate, every £1 of mortgage overpayment saves 22p × the interest rate per year in Section 24 tax. At 4.5% mortgage rate: 22% × 4.5% = 0.99% effective return — guaranteed and tax-free.
3. Salary sacrifice into pension
If pension sacrifice drops your income from Higher (42%) to Intermediate (21%), the Section 24 penalty falls from 22% to 1% on the portion that crosses the band boundary.
David's example: A £12,000 pension sacrifice drops his salary from £55,000 to £43,000 — just below the Higher-rate threshold. His rental income is now taxed at 21% instead of 42%, and the Section 24 penalty on £9,000 interest falls from £1,980 to £90. Combined with the pension tax/NI savings, this is often the highest-ROI move.
4. Sell the property
If the numbers don't work at current mortgage rates and your marginal tax rate, selling may be the rational choice. CGT on residential property is 18% (basic rate) or 24% (higher rate) after the £3,000 annual exempt amount. For Scottish landlords, CGT is based on UK basic-rate band limits — not Scottish bands.
5. Increase rents
The least popular option with tenants, but Section 24 has contributed to rising rents across the UK. Under Scotland's Private Residential Tenancy rules, rent increases are limited — check the rent cap under the Housing (Scotland) Act 2025 before increasing.
Scotland vs England: why it's worse here
| Factor | Scotland | England |
|---|---|---|
| Higher rate | 42% | 40% |
| Section 24 penalty per £1 of interest | 22p | 20p |
| On £15,000 interest | £3,300 extra | £3,000 extra |
| Advanced/Additional rate penalty | 25p/28p | 25p |
| Higher rate kicks in at | £43,663 | £50,270 |
Scotland's 42% rate AND its lower threshold (£43,663 vs £50,270) mean more landlords are caught at the Higher rate, and each one pays a higher penalty per pound of interest.
Common mistakes
1. Thinking Section 24 doesn't apply in Scotland
It does. Section 24 is a UK-wide provision. Scottish landlords pay Scottish tax rates, but the mortgage interest restriction is identical.
2. Deducting mortgage interest on your tax return
You cannot deduct mortgage interest from rental profit. You declare the full rental income, claim all other expenses, then take the 20% basic rate credit separately. Getting this wrong triggers HMRC corrections and potential penalties.
3. Not considering incorporation for new purchases
If you're buying a new BTL property and you're a Higher-rate taxpayer, buying through a limited company is almost always better from day one. The LBTT and legal costs are the same either way — you avoid the expensive transfer later.
4. Ignoring pension sacrifice as a Section 24 fix
Most landlords think about Section 24 in isolation. But if pension sacrifice drops your marginal rate, the Section 24 penalty drops with it — and you get pension tax relief on top. The combined ROI often exceeds 200%.
Try it yourself
Model your rental income, LBTT, ADS, Section 24 impact, and net returns at Scottish tax rates.
Open Buy-to-Let Tax CalculatorNo sign-up required.
Frequently Asked Questions
Does Section 24 apply to commercial property?
No. Section 24 only applies to residential property let to individuals. Commercial property, holiday lets (FHL — though this relief ended April 2025), and property let to a company are not affected.
Can I offset rental losses against other income?
Rental losses can only be carried forward against future rental profits from the same property business. You cannot offset rental losses against employment income, and Section 24 can create "artificial" losses that are particularly frustrating.
Does Section 24 affect joint ownership?
Each owner is taxed on their share of the profit. If you own 50/50 with a spouse, each declares 50% of rental income and gets 50% of the mortgage interest credit. If one spouse is Basic rate and the other Higher rate, the penalty differs for each.
What about remortgaging — does the new interest count?
Yes. The 20% credit applies to interest on loans used to purchase, improve, or repair the property. Remortgaging to release equity for a holiday doesn't qualify — only the portion of interest on the original purchase loan (or equivalent) qualifies.
Is there any talk of repealing Section 24?
No. Neither the UK Government nor opposition have proposed repeal. The policy is settled. Landlords need to plan around it permanently, not hope for reversal.
Related Articles
- Buy-to-Let Tax Scotland — full rental income tax guide
- Landlord Insurance Scotland — PRT-specific cover
- LBTT Explained — property purchase tax
- Scottish Income Tax Rates 2026/27 — all 6 bands
- Pension Tax Relief Scotland — salary sacrifice to reduce your rate
This article is for informational purposes only and does not constitute financial, tax, or property advice. Section 24 calculations depend on individual circumstances — speak to a qualified tax adviser before making property or incorporation decisions.
Sources: Finance Act 2015 — Section 24, HMRC — Property income manual, Scottish Government — Income tax