Section 24 Mortgage Interest Relief: Impact on Expat Landlords

The Finance (No. 2) Act 2015 introduced what is commonly called "Section 24" — a restriction on the amount of mortgage interest individual landlords can offset against their rental income. Fully phased in by April 2020, this change has had a profound effect on the economics of leveraged buy-to-let investment for individuals. For expat landlords, whose overseas employment income frequently pushes them into higher-rate tax brackets, the impact has been particularly acute.

This article explains the mechanics of Section 24, how it affects expats differently from UK-resident landlords, and what options exist to mitigate its impact.

What Section 24 Changed

Before the restriction, individual landlords could deduct their full mortgage interest from rental income before calculating their taxable profit. A landlord with £20,000 rental income and £14,000 mortgage interest had a taxable profit of £6,000.

Section 24 removed this deduction entirely. Instead, landlords now receive a basic-rate tax credit equal to 20% of their finance costs. The same landlord now has a taxable profit of £20,000 (the full rent, with no interest deduction), and then applies a tax credit of £2,800 (20% × £14,000) to their final tax bill.

For a basic-rate taxpayer (20%), the net effect is broadly neutral: the extra tax on the £14,000 of now-taxable income is £2,800, and the credit is also £2,800. But for higher-rate taxpayers (40%) or additional-rate taxpayers (45%), the position is much worse.

The Maths for a Higher-Rate Taxpayer

Consider an expat landlord with £80,000 of overseas employment income and one UK rental property with:

• Gross rent: £18,000
• Mortgage interest: £11,000
• Other allowable costs: £3,000
• Pre-restriction net profit: £4,000

Under Section 24:

• Taxable rental income: £18,000 − £3,000 = £15,000 (interest is excluded from deductions)
• This is added to the £80,000 employment income, giving total UK taxable income of £95,000
• The additional £15,000 is taxed at 40%, generating £6,000 tax
• Tax credit (20% × £11,000) = £2,200
• Net tax on the rental: £6,000 − £2,200 = £3,800

The actual cash surplus from the property before tax is £4,000. After tax, only £200 remains. For an additional-rate taxpayer, the position could be worse.

These figures are illustrative. Personal circumstances, other deductions, and changes to tax rates will affect the outcome. Seek professional advice.

Why Expats Are Disproportionately Affected

The Section 24 restriction bites hardest on higher-rate taxpayers. Expats are disproportionately affected because:

Overseas employment income counts. HMRC taxes UK rental income on non-resident landlords. Although the overseas employment income itself is not taxable in the UK (subject to treaty relief), it still determines the rate at which UK rental profits are taxed. The rental income is stacked on top of any UK income for band purposes, often pushing it into the 40% or 45% band.

Multiple properties compound the issue. Expats who assembled a portfolio before leaving the UK may find that aggregated rental income — even after costs — falls squarely in the higher-rate band, with limited scope to reduce taxable profits.

Personal allowance may be unavailable. Non-UK residents are not automatically entitled to the UK personal allowance (£12,570 in 2026/27). Entitlement depends on citizenship or the double taxation agreement with the country of residence. If the allowance is unavailable, the full rental profit is taxable from the first pound.

Section 24 Does Not Apply to Companies

The restriction applies only to individuals (and partnerships and LLPs). Limited companies can continue to deduct mortgage interest in full as a business expense. This has led many landlords — including expats — to consider transferring their portfolio to a company structure.

However, transferring existing properties into a company is not straightforward:

• The transfer is treated as a disposal at market value, triggering capital gains tax on accrued gains
• Stamp duty land tax (SDLT) arises on the transfer at market value, including the additional-rate surcharges for second properties
• Mortgage lenders may require the existing personal mortgage to be redeemed and a new corporate mortgage to be obtained (often at a higher rate)

The incorporation relief available to genuine property businesses may allow CGT rollover in certain cases, but the conditions are strict and the relief does not extend to SDLT. A full cost-benefit analysis is essential before proceeding.

Alternative Mitigations for Individual Landlords

If restructuring to a company is not cost-effective, other options can reduce the Section 24 impact:

Increase non-financed property exposure. Paying down mortgages reduces finance costs and therefore the amount subject to the restriction. However, this requires capital and reduces the leveraged return on investment.

Sell and reinvest. Properties with low yields or high loan-to-value ratios may no longer generate acceptable after-tax returns. Disposing of underperforming assets and redeploying capital elsewhere — whether into unencumbered property, a pension, or other investments — may improve overall efficiency.

Spousal transfer. If a spouse is a basic-rate taxpayer, transferring beneficial ownership to them can reduce the marginal rate at which rental income is taxed. However, HMRC's income-shifting rules and stamp duty on transfer must be considered. A Declaration of Trust splitting beneficial interest without triggering SDLT may be possible in certain circumstances.

Pension contributions. Making pension contributions can reduce adjusted net income, pulling rental income back from the 40% band in some cases. Expats working abroad may have limited UK pension contribution entitlement (generally capped at earnings relevant to UK tax relief), so this is a partial solution.

Review interest-only versus repayment mortgages. The Section 24 restriction applies to total finance costs, not merely interest-only amounts. However, with an interest-only mortgage the cost is entirely finance cost, whereas with a repayment mortgage the capital repayment element is not tax-deductible anyway. The choice between interest-only and repayment should be made on total cash-flow and investment strategy grounds.

Impact on Portfolio Viability

Section 24 has reduced the viable universe of buy-to-let investments for higher-rate individual taxpayers. Properties with lower gross yields — particularly in prime London locations where yields of 3% to 4% are common — become very difficult to justify financially when significantly leveraged.

Properties with gross yields of 5% or above, modest mortgage debt relative to value, or no mortgage at all remain financially viable under the current regime. Investors assembling new portfolios should model after-tax returns explicitly, incorporating the Section 24 impact, before committing to a purchase.

Rental income is not guaranteed and property values can fall. Tax rules may change.

The Future of Section 24

The restriction has been a settled feature of UK tax law since 2020, and neither of the two major parties showed any intention of reversing it in their 2024 manifestos. It seems likely to remain in place for the foreseeable future. Any future government consultation on property taxation would, of course, be worth monitoring.

How Global Investments Can Help

Global Investments advises UK expats with buy-to-let portfolios across a wide range of jurisdictions. Our advisers can model the precise Section 24 impact on your portfolio, taking into account your overseas income, available personal allowance, and the specific terms of any applicable double taxation agreement. Where restructuring or disposal is being considered, we work with specialist UK tax advisers to assess the full transactional costs and ensure the decision is made on sound financial evidence. Contact us to discuss your UK property holdings in the context of your overall international financial plan.