Key takeaways
- Since April 2020 an individual landlord deducts 0% of mortgage interest from rent. Relief arrives instead as a tax reduction worth 20% of the interest, whatever your own rate.
- In the worked example, the same flat left £2,400 after tax under the pre-2017 rules and £200 under the 2026 to 2027 rules — a £2,200 swing.
- Raise the interest to £16,000 and the landlord runs a £1,000 cash loss and still owes £3,000 of tax, because the reduction is capped at the property's profit.
- A company pays 19% corporation tax on the same £4,000 profit, but extracting it as a dividend costs 35.75%, leaving £2,082 against the individual's £200.
- Moving that £300,000 flat into a company cost £20,000 in stamp duty and £28,080 in capital gains tax — 25.6 years of the £1,882 annual saving.
Section 24 changed what gets taxed, not what you earn
If you let a flat in your own name and the mortgage is large, you've probably asked two questions. Why is the tax bill bigger than the profit? And would a company be better?
Here's the first answer. Since April 2020 you can't deduct any mortgage interest from your rent. HMRC's property income manual dates the change precisely: the rules were "introduced by section 24 of the Finance (No. 2) Act 2015". They phased in from 2017/18, when 75% of finance costs were still deductible, and by 2020/21 the deductible share was 0%. In place of the deduction you get a tax reduction at the basic rate — 20% for the 2026 to 2027 tax year. If you pay 40%, that's a 20-point haircut on every pound of interest.
Here's the second. A company does deduct the interest, so on the numbers below it leaves roughly ten times as much in your hand each year. Moving a property you already own into that company is the hard part. In the example that follows, the stamp duty and capital gains tax on the transfer come to £48,080 against an annual saving of £1,882.
The restriction is narrower than the noise suggests. It applies to individuals, trustees and personal representatives. Per HMRC, "companies carrying on property business are not affected", and loans wholly for commercial property were never in scope. Furnished holiday lettings were carved out too, until those rules ceased to apply from 6 April 2025.
What the restriction does to one flat, before and after
Take a landlord with a £60,000 salary and one let property in England. Rent is £18,000 a year. Other allowable expenses — insurance, repairs, agent's fees, the things gov.uk calls "the day-to-day running of the property" — come to £3,000. The mortgage is £220,000 at 5%, so interest is £11,000.
Cash is cash. £18,000 less £3,000 less £11,000 leaves £4,000.
Under the pre-2017 rules, at today's rates, £4,000 was also the taxable profit. At 40% the tax was £1,600 and the landlord kept £2,400.
Under the 2026 to 2027 rules the interest isn't deductible. Taxable property profit becomes £15,000. At 40% that's £6,000 of tax. Then the reduction: 20% of £11,000, or £2,200. Final tax £3,800. Out of the same £4,000 of cash, the landlord keeps £200.
Nothing about the flat changed. The tenant paid the same rent and the lender took the same interest. The £2,200 gap is the difference between relief at 40% and relief at 20%, and nothing else.
The cap on the reduction is what turns a loss into a tax bill
The reduction is not always 20% of your interest. gov.uk defines it as "the basic rate value (currently 20%) of the lower of" three amounts: the finance costs, the property business profits, and adjusted total income above your personal allowance. The middle one is the trap.
Say the fixed rate ends and interest rises to £16,000. Cash is now £18,000 less £3,000 less £16,000, which is minus £1,000. A loss.
The tax calculation doesn't see a loss. Taxable property profit is still £15,000, because interest still isn't deductible. Tax at 40% is £6,000. The reduction is 20% of the lower of £16,000 and £15,000, so £3,000. Final tax on the property: £3,000.
The landlord is £1,000 down in cash and £3,000 down in tax. That's £4,000 out of pocket on a property that lost money. The unused £1,000 of finance cost carries forward, exactly as in HMRC's own Example 4, where £2,000 rolls into the next year.
This isn't an edge case. It's the arithmetic working as drafted, any time interest exceeds the property's profit before interest.
Most landlords never feel it, which is why the argument stays muddled
HMRC's guidance works its case studies at 2016 to 2017 rates, and says of the first landlord that she is "one of the estimated 82% of landlords that don't have any additional tax to pay". Her income, without the interest deduction, still sat below the higher rate threshold. The original costing published with Summer Budget 2015 put the same point the other way: "1 in 5 individual landlords will receive less relief as a result of this measure."
The exposed group is not small. HMRC's property rental income statistics for 2023 to 2024 count 2.86 million unincorporated landlords, of whom 1.17 million — 40.6% — declared residential finance costs. Those costs came to £9.05 billion, "31% of all expenses claimed against UK property income by unincorporated landlords". Buy-to-let still took 8.9% of gross mortgage advances in the first quarter of 2026, on Bank of England data.
A company deducts the interest, and that is the whole of its advantage
gov.uk states the difference in one sentence: "If you're a company paying Corporation Tax, you can claim interest on property loans as an allowable expense. You cannot do this if you're an individual landlord who pays Income Tax."
So the company's taxable profit on our flat is the cash profit: £4,000. Corporation tax at the small profits rate is 19%, the rate for "a profit of £50,000 or less", unchanged since 1 April 2023. That's £760. The company keeps £3,240.
Set £3,240 beside the £200 an individual keeps and incorporation looks unanswerable. It also isn't a like-for-like comparison yet, because the £3,240 belongs to the company rather than to you. Above £250,000 of profit the main rate of 25% applies, with Marginal Relief between the two limits — not our landlord's problem, but worth knowing before a portfolio grows into it.
Getting the money out costs 35.75%, and that is where the gap closes
Paying the profit out as a dividend triggers a second charge. For a higher-rate taxpayer in 2026 to 2027, the dividend upper rate is 35.75% on dividends above a £500 allowance. Assume the allowance is used elsewhere. Tax on £3,240 is £1,158, leaving £2,082.
£2,082 against £200. On this property, at these rates, the company route is worth £1,882 a year after both taxes. Before extraction the gap looked like £3,040. Extraction eats nearly 40% of it.
Leave the profit in the company and you keep the full £3,240 — as a company asset you can't spend. A landlord reinvesting rents into the next deposit and a landlord living on the rent are running different sums. The comparison only means something once you say which one you are.
A mortgage rate premium of 1.6 percentage points erases the saving
Company buy-to-let mortgages have generally priced above personal ones. No official statistics series publishes that spread — the Bank of England splits buy-to-let from owner-occupier lending, not company from individual — so rather than assert a number, here's what each point costs.
One extra percentage point on the £220,000 loan is £2,200 of extra interest a year. Inside the company that interest is deductible, so the cost after 19% corporation tax relief is £1,782. After the 35.75% dividend charge, the hit to what actually reaches your hand is £1,145.
Set that against the £1,882 advantage and the break-even premium is about 1.6 percentage points. The gap grows with the loan, not with the rent: on a £220,000 holding, each extra point of rate is £2,200 before tax. If you're quoted a company rate more than about 1.6 points above the personal equivalent, the annual saving in this example has already gone.
Moving a property you already own is a sale, and HMRC prices it as one
This is where most of the decision gets made, and it has nothing to do with running costs.
Start with stamp duty. A transfer to your own company is not a paperwork exercise. HMRC's stamp duty manual is blunt: section 53 of the Finance Act 2003 catches "all transfers between a vendor (individual or company) and a company connected to them", and the chargeable consideration is "not less than the market value ... irrespective of the consideration (or lack of it) actually passing". Companies also pay the higher rates on any residential property costing "£40,000 or more". Those higher rates rose "from 3 to 5 percentage points above the standard residential rates" for transactions completing on or after 31 October 2024.
On a £300,000 flat that produces HMRC's own worked figure: 5% on the first £125,000 band = £6,250, 7% on the next £125,000 = £8,750, 10% on the final £50,000 = £5,000. Total £20,000. Above £500,000 a company can instead meet a single 17% rate, raised from 15% on the same date, subject to reliefs that include one for property rental businesses.
Then capital gains tax. Transferring to a connected company is a disposal at market value. If the flat cost £180,000 and is worth £300,000, the gain is £120,000. Take off the 2026 to 2027 annual exempt amount of £3,000 and £117,000 is taxable at 24% for a higher-rate taxpayer. That's £28,080, reportable and payable within 60 days.
£20,000 plus £28,080 is £48,080. Divided by the £1,882 annual advantage, that's 25.6 years.
Two reliefs can overturn that, and this is the strongest case against it
Incorporation relief, under section 162 of the Taxation of Chargeable Gains Act 1992, rolls the gain into the shares rather than taxing it. gov.uk puts the effect plainly: "You will not pay any tax until you sell (or 'dispose of') the shares", and "you'll get it automatically if you're eligible". The condition is that you transfer "a business as a going concern with the whole of its assets".
HMRC's capital gains manual says "business" is undefined, that "it is a question of fact whether a particular activity constitutes a business", and points to the Upper Tribunal's decision in Ramsay, which asks whether there's "a serious undertaking earnestly pursued" carried on "with reasonable or recognisable continuity". One flat with a letting agent is a long way from that. A full-time operation with a dozen properties is a different conversation.
Stamp duty has a parallel route. HMRC's worked example at SDLTM34170 has a partnership transferring a £250,000 property to a connected company. The section 53 market-value charge would be £250,000, but the partnership rules take precedence and only £150,000 is chargeable.
Both routes turn on facts nobody can assess from a web page: how many properties, how much time, whether a real partnership exists and for how long. Incorporation engages three taxes at once, and getting the "business" question wrong costs the full capital gains bill. It's the kind of decision people take with a solicitor and an accountant who have read the deeds and the mortgage offer. Nothing here recommends a structure, and the arithmetic above is one example rather than a conclusion about your property.
One case flips entirely. On a new purchase there is no transfer, so no market-value disposal and no capital gains event, and the 5-point higher rate applies whichever way you buy. The £48,080 disappears and the £1,882 starts in year one.
The 2027 property rates move both sides of the sum
The Budget 2025 technical note, published on 26 November 2025, gives property income its own rates from 6 April 2027: "22% at the property basic rate, 42% at the property higher rate, and 47% at the property additional rate". Relief for finance costs moves with them, "calculated at the property basic rate (22%)".
Run the same flat on those rates. Tax at 42% on £15,000 is £6,300. The reduction at 22% of £11,000 is £2,420. Tax of £3,880 leaves £120 of the same £4,000.
So the higher relief rate hands back part of the higher tax rate, but not all of it: £200 becomes £120. Corporation tax and dividend rates aren't touched by that measure, so the company side stays at £2,082 and the annual gap widens to £1,962. HMRC estimates that by 2029 to 2030 the change affects 2.4 million landlords, 6% of taxpayers.
What this arithmetic cannot tell you
It's one property, one salary, one set of rates. Change any of them and the ranking can change. A basic-rate landlord whose income stays inside the band running to £50,270 loses nothing to the restriction, because 20% relief is the rate they'd have had anyway. That is HMRC's 82%, measured at 2016 to 2017 rates. A landlord whose property income pushes them into the personal allowance taper meets a marginal rate well above 40%, which this example doesn't model; the current rates and thresholds table shows where those cliffs sit.
Geography matters. Stamp duty land tax covers England and Northern Ireland; the increase note says the measure "does not apply to Scotland or Wales where devolved land transaction taxes apply". The new property income rates cover England, Wales and Northern Ireland, with Scotland's position still under discussion.
The company side is also priced generously here. We've costed corporation tax, dividend tax and the mortgage premium. We have not costed annual accounts, Companies House filings, the solicitor who does the transfer, early repayment charges on the existing loan, or the personal guarantee most lenders want. No official series publishes those, and inventing figures would flatter one side of a comparison a reader is trying to make honestly. Every one of them runs against the company.
Two further gaps. Shares in a property company and a directly held flat are not the same asset on death, and the nil-rate band and taper rules treat them differently. And none of this asks the prior question — whether geared residential property is the exposure you want at all. Listed property against bricks you manage yourself is a genuinely different risk profile, with no stamp duty and no tenant.
What would change the answer
A smaller mortgage. The restriction is a tax on interest that no longer counts. With no borrowing there is nothing to restrict, and personal ownership costs nothing extra. The damage scales with the loan, not the rent.
A gain that isn't there yet. The £28,080 above is tax on £120,000 of growth. A property bought recently, near today's value, has almost no gain to crystallise. The transfer cost collapses to the stamp duty alone — £20,000, or 10.6 years of payback.
A business rather than a property. If the Ramsay factors are met, incorporation relief defers the gain and the partnership rules can cut the stamp duty. That's a question of hours worked and properties held, decided on evidence rather than intention.
Relief at your own rate. The reduction has been pegged to the basic rate since 2020 and moves to 22% in 2027. Nothing in the legislated position restores relief at a landlord's marginal rate, and if that ever changed, most of this piece would stop mattering.
The number to watch isn't the tax rate. It's the ratio of interest to profit-before-interest on each property you hold. Once interest exceeds that profit, the cap bites and the tax arrives whether or not you made money. LedgerTouch tracks that ratio alongside everything else; a spreadsheet does it just as well, as long as somebody updates it the month the fixed rate ends.