What Section 24 changes in your deal model
Section 24 is an existing restriction on residential finance-cost relief, fully phased in from April 2020; it is not a new tax introduced in 2026. For affected individual landlords, mortgage interest is a cash outflow but is not deducted when calculating taxable property profit. Relief instead enters the income-tax calculation as a tax reduction. This is why a profitable-looking rental can produce much less spendable cash than its gross yield suggests.
The rules cover relevant individuals, partnerships and trusts. Companies use different tax rules, and commercial-property interest requires separate treatment. Check HMRC's current rental-income guidance for scope and allowable costs. For a broader introduction, read the Section 24 guide.
This case study uses 2026/27 assumptions. The later property-income rate changes are separated below so a forecast does not silently apply one year's rates to another.
Worked example: £18,000 rent and £6,750 mortgage interest
These are hypothetical annual figures, not a market forecast or personal tax calculation. Assume an individual landlord, no property losses brought forward, sufficient income and tax liability to use the full reducer, and all rental profit within the stated marginal tax band. Personal-allowance taper, benefit charges, other income interactions, capital expenditure and mortgage capital repayments are excluded.
| Input | Amount | Treatment in this example |
|---|---|---|
| Purchase price | £180,000 | Yield denominator; excludes acquisition costs |
| Rent actually collected | £18,000 | Rental income; no additional void deduction |
| Management fees paid | £1,800 | Assumed allowable operating expense |
| Repairs paid | £900 | Assumed revenue repairs, not improvements or a reserve |
| Insurance paid | £600 | Assumed allowable operating expense |
| Other allowable costs paid | £600 | Supported business costs, not a contingency |
| Mortgage interest | £6,750 | Finance-cost reducer; not an operating deduction |
The operating expenses total £3,900. Rental profit before finance costs is £14,100 (£18,000 − £3,900). Cash before income tax is £7,350 (£14,100 − £6,750).
For a landlord whose entire £14,100 rental profit falls in the 40% band:
- Income tax before finance relief: £14,100 × 40% = £5,640.
- Finance-cost reduction, assuming it is fully available: £6,750 × 20% = £1,350.
- Tax attributable to the rental profit: £5,640 − £1,350 = £4,290.
- Cash after interest and tax: £14,100 − £6,750 − £4,290 = £3,060 a year, or £255 a month.
Gross yield is 10%; operating yield before finance and tax is about 7.83%. The £3,060 after-tax cash is 1.70% of the purchase price. That last percentage is not cash-on-cash return, which needs the actual investor cash committed, including deposit, taxes, fees and works.
Using identical assumptions, a wholly 20%-band calculation gives £1,470 tax and £5,880 after-tax cash. A wholly 45%-band calculation gives £4,995 tax and £2,355 after-tax cash. These are comparisons of stated rates, not whole-person tax returns; Scottish rates and mixed-band income need their own calculation.
Why a void allowance is not a tax deduction
A screening spreadsheet may reserve 5% of scheduled rent for vacancy and another amount for future repairs. Those buffers help assess risk, but they do not automatically become tax expenses. If a vacancy reduces rent actually collected, start with that lower income. Do not also deduct the same lost rent as an expense. A repair reserve likewise differs from a repair bill eligible for deduction under the accounting rules used.
In this example, adding a £900 forecast void allowance to the £3,900 expenses while retaining £18,000 collected rent would understate taxable profit by £900. At the assumed 40% rate and unchanged relief, tax would be understated by £360. Keep a forecast cash model and the tax computation clearly reconciled.
The gross and net yield calculator helps model operating cash and borrowing assumptions. It does not determine your complete Section 24 liability or certify deductions. Take its assumptions into a separate tax computation.
The reduction is limited, not an automatic interest refund
For 2026/27, HMRC calculates the 20% reduction using the lowest of eligible finance costs including amounts carried forward, relevant property-business profits after losses, and adjusted total income above the personal allowance, excluding savings and dividends. The reduction cannot create a tax refund. Where the profit or income cap applies, unused finance costs can be carried forward under the rules.
That means a loss-making property, low other income, or previous losses can invalidate the full £1,350 reduction assumed above. Check HMRC's finance-cost calculation and carry-forward examples. Those examples use historical personal allowances and thresholds; use them for the mechanism, not today's tax bands.
Separate the changes from 6 April 2027
The Finance Act 2026 introduces separate property-income rates for 2027/28. For England and Northern Ireland these are 22%, 42% and 47%; residential finance-cost relief moves to the 22% property basic rate. Confirm the applicable devolved rates for Scottish and Welsh taxpayers rather than assuming the same bands everywhere. HMRC explains the finance-relief mechanism in its technical note on property-income rates.
As a forward scenario only, applying 42% tax and a fully available 22% reducer to this example gives £5,922 tax before relief, £1,485 relief, £4,437 tax and £2,913 cash after tax. This is £147 less cash than the 2026/27 40%-band case. It assumes all other inputs and eligibility remain unchanged.
What to check before changing ownership structure
A company is not an automatic cure. A transfer of an existing property can involve transaction tax, capital-gains tax, refinancing costs and professional fees; taking profits out also affects the personal result. Compare those costs and ongoing administration with a qualified tax adviser before acting.
For the investment decision, retain three distinct outputs: operating profit, cash after finance, and cash after the actual owner's tax. Stress rent and interest separately, and use the buy-to-let ICR calculator for lender affordability. Passing ICR does not prove after-tax profitability.
Reviewed against the linked official sources on 28 October 2026. Educational modelling example; obtain advice for your tax return and ownership decisions.
