The rent covered the mortgage. The tax bill suggested it did not.
The Scenario
You inherited a flat in Kingston three years ago. Your mother had owned it outright for the last decade of her life, having paid off the mortgage in her early sixties, and had been using the rental income as a supplement to her pension. When it passed to you through the estate, you were already a homeowner with a mortgage of your own, and the decision to let it out rather than sell it felt straightforward. The property was tenanted, the managing agent was in place, and the income was welcome.
To release equity for improvements to your own home, you took a buy-to-let mortgage on the inherited property. The rental income comfortably covered the mortgage payment, and the net income after the mortgage was a useful addition to the household budget. Your accountant at the time registered the rental income on your Self Assessment return. You did not ask many questions about the detail.
Two years later, the tax bill on the rental income was larger than you expected, and larger than it had been the previous year despite the fact that the rent had not increased. Something had changed, and you were not sure what.
At a Glance
- Client profile: Higher-rate taxpayer, salaried professional, Kingston, inherited residential property let on an assured shorthold tenancy
- Situation: Rental income reported on Self Assessment; mortgage interest restriction under Section 24 applying in full; effective tax rate on rental income not understood
- Core issue: Mortgage interest no longer fully deductible; 20% tax credit replacing full relief; net rental yield materially lower than assumed
- Cause: Section 24 transition completed by 2020; impact not previously explained; property held in personal name without ownership structure review
- Resolution: Full recalculation of rental profit and tax under Section 24, ownership transfer to spouse reviewed, SDLT position on mortgage checked, remortgage and yield review, basic-rate band headroom confirmed
- Outcome: Partial transfer of beneficial ownership to spouse reducing blended tax rate; annual tax saving of approximately £1,536 on the modelled 50% transfer; property retained on improved net yield basis
What Section 24 actually does, and why it still catches landlords out
Section 24 of the Finance (No. 2) Act 2015 removed the ability of individual landlords to deduct mortgage interest as an expense against rental income. In its place, landlords receive a basic rate tax credit of 20 per cent of finance costs. The change was phased in between 2017 and 2020 and has applied in full since the 2020/21 tax year.
The practical consequence is this.
Before Section 24, a landlord with rental income of £18,000 and mortgage interest of £10,000 would calculate taxable profit as £8,000. A higher rate taxpayer would pay 40 per cent of £8,000, which is £3,200. After Section 24, the same landlord calculates taxable profit as £18,000, the full rental income with no deduction for mortgage interest, pays 40 per cent of that, which is £7,200, and then deducts the 20 per cent tax credit of £2,000 (20 per cent of the £10,000 interest). The net tax liability is £5,200, a difference of £2,000 from the pre-Section 24 position.
For a higher rate taxpayer, Section 24 does not merely reduce the amount of mortgage interest that can be deducted. It effectively means the landlord is taxed on income they have already spent on the mortgage. In cases where the mortgage interest is large relative to the rental income, the net rental yield after tax can be very low.
The restriction applies to properties held in an individual’s personal name. It does not apply to properties held in a limited company. This distinction drives a significant proportion of the ownership structure conversations that landlords now have with their advisers, though the decision to incorporate is not straightforward and involves stamp duty, capital gains, and mortgage availability considerations that must be worked through carefully.
The article How to Keep Property Records That Will Save You Money When You Sell covers the wider record-keeping context for property owners. Section 24 sits within a broader set of considerations that individual landlords increasingly need to manage actively rather than passively.
Why accidental landlords are particularly exposed
The term accidental landlord covers a range of situations: someone who inherits a property, someone who cannot sell their previous home when they move, someone whose relationship changes and leaves one party in a property they no longer occupy. What these situations have in common is that the person did not set out to be a landlord, did not make an active investment decision, and in many cases did not seek advice about the tax implications before the letting arrangement began.
Accidental landlords tend to be underinformed about Section 24 for two reasons. The first is that they were not paying attention when the change was introduced, because they were not yet landlords and had no reason to follow property tax news. The second is that the letting arrangement often begins without a professional review, because it feels like a temporary or informal arrangement that does not require one. By the time the Self Assessment return arrives with an unexpected tax liability, the mortgage is in place, the tenancy is established, and the ownership structure has already been set.
Inherited properties carry an additional complication. Where the property passes through an estate, the CGT base cost for the inheriting landlord is normally the market value at the date of death, often referred to as the probate value. This may be the value reported for probate and IHT purposes, even where no IHT was ultimately payable. It means the inheriting landlord is working with a different financial profile from someone who bought the property as an investment, and the assumptions that applied to the original owner do not necessarily carry over.
“The inherited property landlord is often in the most complex position of all, because they have acquired an asset with an existing tenancy, an existing structure, and in many cases an existing mortgage they have added to, without having made the planning decisions that a deliberate property investor would make at the outset. We spend a significant amount of time with these clients simply establishing what the actual position is before we can discuss what to do about it.”
How the scenario unfolded
The case described here is drawn from composite client experience. The details reflect patterns we encounter regularly among property-owning individuals in Kingston, Richmond, and the surrounding area.
The client was a salaried professional working in financial services in central London, having inherited the Kingston flat from her mother’s estate in 2022. The probate value was £385,000. She had taken a buy-to-let mortgage of £180,000, with monthly interest payments of approximately £780 at a fixed rate that was due to expire in eighteen months. The monthly rent was £1,550, managed through an agent at a fee of 10 per cent.
Her income from employment was approximately £95,000, which placed her firmly in the higher rate band. She had been reporting the rental income on Self Assessment but had not previously had a detailed conversation about Section 24 and its implications for her specific position.
When she came to see our personal tax planning team, she brought three years of Self Assessment returns. The calculation for the most recent year, properly reconstructed under Section 24, looked like this:
The difference of £1,872 per year was real and persistent. More significantly, the effective tax rate on the rental income had moved from 13 per cent to 23 per cent, and when set against the net rental income after the mortgage payment and agent fees, the actual cash yield from the property was considerably thinner than she had assumed.
There was also a forward-looking concern. The fixed-rate mortgage was due to expire in eighteen months, in an environment where rates had risen materially from the level at which the original product had been set. A remortgage at a higher rate would increase the finance cost, which under Section 24 does not reduce the taxable profit but does reduce the cash available.
What the process involved
The first consideration was ownership structure. Her husband was a basic rate taxpayer, earning approximately £32,000 in self-employment. A transfer of beneficial ownership, using a declaration of trust to allocate a proportion of the rental income and the property’s value to the husband, could mean that a share of the rental income was taxed at 20 per cent rather than 40 per cent.
The mechanics of this arrangement depend on the existing legal and beneficial ownership. Because the property had been inherited as sole ownership, any transfer to joint ownership required legal work on the transfer itself before a declaration of trust and Form 17 election would be relevant. Form 17 applies where spouses or civil partners own property in unequal beneficial shares and want the income taxed according to those actual shares. Because there was an outstanding mortgage, the SDLT position also had to be checked. Where a spouse assumes responsibility for a share of mortgage debt, HMRC may treat that assumed debt as consideration, potentially triggering an SDLT charge.
We modelled a 50 per cent beneficial ownership transfer to the husband. Before proceeding, we also checked his projected taxable income after the transfer to ensure the additional rental profit would remain within the basic-rate band. His existing self-employment income of £32,000, with the additional share of rental profit, stayed comfortably within the higher-rate threshold.
The annual tax saving from the restructured arrangement on the stated rental and finance cost figures was approximately £1,536, reflecting the difference between the higher-rate tax on the transferred share and the basic-rate tax that replaced it:
- Higher-rate spouse: 50% of rental profit taxable at 40%, less 50% of the tax credit. Tax: approximately £2,136.
- Basic-rate spouse: 50% of rental profit taxable at 20%, less 50% of the tax credit. Tax: approximately £600.
- Combined tax after transfer: approximately £2,736.
- Previous combined tax (sole ownership): £4,272.
- Annual saving: approximately £1,536.
The transfer was effected through a solicitor, at a cost of approximately £850 in legal fees. The net benefit in the first year after the arrangement was in place was therefore approximately £686, with the full £1,536 annual saving applying in subsequent years.
The second consideration was the remortgage timing. With eighteen months remaining on the fixed rate, there was a window to begin the remortgage conversation without urgency. A mortgage broker with experience in the buy-to-let market was engaged, and the early indications were that a new product could be secured at a rate that, while higher than the current one, remained within a range where the property continued to generate a positive net yield after tax. The remortgage review also prompted a rental review: the agent confirmed that the current rent was below the market level for equivalent properties in the area, and a modest increase was agreed with the tenant on renewal.
The third consideration was the longer-term holding decision. The property had a probate value of £385,000 and a current estimated market value of approximately £420,000. The CGT base cost was the probate value, so any disposal would crystallise a gain of approximately £35,000, taxed at the residential property CGT rate after the annual exempt amount. The calculation was not alarming, but worth having clearly in view as part of the decision about whether to continue holding, restructure, or sell.
What the outcome looked like
With the beneficial ownership transfer in place, the remortgage agreed at a higher but manageable rate, and the rental income adjusted to the market level, the net annual position from the property looked materially different from where it had started.
The effective tax rate on the rental income fell from 23 per cent to approximately 17 per cent on the blended basis. The annual cash yield from the property, after mortgage payments, agent fees, recurring property costs and tax, moved from a position of mild concern to one that justified continued holding on its own terms rather than purely as a future capital gain play.
More significantly, the client now understood the structure of her tax position and the levers that were available to her. That understanding, rather than any single transaction, was the most durable outcome of the work.
The article Key Factors Affecting Richmond Businesses and Taxpayers in 2026 sets out the wider environment in which these decisions are being made. The combination of frozen income tax thresholds, higher mortgage rates, and the full application of Section 24 has made the economics of individual residential property letting considerably more demanding than they were five years ago.
Frequently asked questions
What is Section 24 and when did it come into effect?
Section 24 of the Finance (No. 2) Act 2015 removed the ability of individual landlords to deduct mortgage interest as a business expense against rental income. In its place, landlords receive a basic rate tax credit of 20 per cent of finance costs. The change was introduced gradually between 2017 and 2020 and has applied in full since the 2020/21 tax year. It affects all individual landlords with mortgaged residential property held in their personal name.
Does Section 24 apply to properties held in a limited company?
No. Section 24 applies only to properties held by individual landlords in their personal name. A company holding residential property can continue to deduct finance costs as a business expense. This is one of the reasons some landlords have considered incorporating, though the decision involves stamp duty land tax on any transfer, potential capital gains tax, and changes in mortgage availability and rate that must all be assessed carefully before a conclusion is reached.
What is a declaration of trust and how does it help with Section 24?
A declaration of trust records the beneficial ownership of a property. It is most commonly used where legal co-owners hold the beneficial interest in proportions that differ from the default position. If the property is currently owned by one spouse only, advice is needed on the transfer mechanics, including the legal transfer, mortgage consent and SDLT position, before relying on a declaration of trust or Form 17. Where spouses or civil partners own property in unequal beneficial shares and want the income taxed in those actual shares, a declaration of trust combined with a Form 17 election to HMRC may be the appropriate mechanism.
Does transferring beneficial ownership trigger a CGT or SDLT charge?
A transfer of beneficial interest between spouses or civil partners who are living together is generally exempt from CGT, because transfers between spouses are treated as taking place at no gain and no loss. Stamp Duty Land Tax may apply where the transferee assumes a share of an outstanding mortgage, because HMRC may treat the assumed mortgage debt as consideration. The SDLT calculation depends on the mortgage balance and the proportion being transferred. A solicitor experienced in this area should be involved in the mechanics.
What expenses can a landlord still deduct against rental income under Section 24?
Allowable deductions against rental income include agent management fees, insurance premiums, routine maintenance and repair costs, accountancy fees related to the letting business, ground rent and service charges, and certain other costs directly incurred in letting the property. Mortgage interest is no longer deductible as an expense, but a 20 per cent tax credit on finance costs is available. Capital improvements are not deductible as revenue expenses.
What is the CGT base cost for an inherited property?
For a property inherited through an estate, the CGT base cost is normally the market value at the date of death, often referred to as the probate value. This may be the value reported for probate and IHT purposes, even where no IHT was ultimately payable. It effectively resets the acquisition cost, meaning that growth in value during the deceased’s ownership is not subject to CGT in the hands of the beneficiary. Growth from the probate value onwards is subject to CGT at the normal rates on any future disposal.
What happens to the Section 24 tax credit if rental income falls below the mortgage interest?
The tax credit is calculated at 20 per cent of the lower of the finance costs, the property profits before the credit, or the total income above the personal allowance. Where the property makes a loss because allowable expenses other than mortgage interest exceed the rental income, the mortgage interest forms part of a carried-forward figure rather than generating an immediate credit. The rules in this area are detailed and worth discussing with an adviser if the property income is close to breakeven.
Should an accidental landlord consider selling rather than continuing to let?
The decision depends on the CGT position, the current and projected net yield after tax, the condition of the property, and the landlord’s broader financial position. A property inherited at a probate value close to its current market value has a limited CGT liability on disposal and may be worth selling if the net yield after Section 24 is below what the proceeds could generate elsewhere. The right answer requires both calculations to be done with current numbers.
If this feels familiar
If you have inherited a property or found yourself a landlord through circumstances rather than intention, and the tax position has not been reviewed since Section 24 took full effect, the gap between what you are paying and what you could be paying is worth understanding. The structure of the ownership, the mortgage, and the income split may all be adjustable, but each adjustment has its own implications that need to be worked through in the right order.
Our personal tax planning team works with landlords and property owners across Kingston, Richmond, and the wider south-west London area. If you would like to understand your current position and what options are available, we are happy to have that conversation.
About the author
Donovan Crutchfield, Area Managing Partner, Xeinadin Richmond
LinkedIn: Donovan Crutchfield | LinkedIn
Donovan works with owner-managed businesses and private individuals across Richmond-upon-Thames and the wider South West London catchment. His practice includes a significant number of property-owning individuals navigating the personal tax and ownership structure questions that arise from residential letting.
This case study is based on composite client experience and does not represent any single individual. All identifying details have been changed. The information provided is for general guidance only and should not be treated as a substitute for professional tax advice specific to your circumstances.
