Section 24 and the cash that tax does not see.

Since the restriction was fully in force, finance costs on a residential letting held in your own name are not a deduction from rental profit. You work out the profit first. You then receive a tax reduction at the basic rate on the finance costs, limited to the lowest of three figures: the finance costs themselves, the property profits of the year, and your adjusted total income above the personal allowance. Unused finance costs can be carried forward. People call this Section 24. The detail lives in the Income Tax (Trading and Other Income) Act 2005 and the way the Finance (No. 2) Act 2015 changed it. A tax adviser applies it to a return. This note only shows why the cash ledger and the tax bill can diverge.

An illustration that is not one of the three houses

Take a landlord in England with a salary of £62,000.00, no other reliefs, and one letting. Headline rent £24,000.00. Allowable running costs, not including interest, £4,000.00. Mortgage interest £9,000.00. Personal allowance £12,570.00. Higher rate 40% above £50,270 of income. Scottish bands are different. This ignores student loans, pension contributions, the personal allowance taper, and the High Income Child Benefit Charge, any of which can move the bill.

Cash kept after costs and interest, before tax, is £24,000.00 minus £4,000.00 minus £9,000.00, which is £11,000.00.

Profit on the tax return does not subtract the interest. It is £20,000.00. The salary has already used the basic-rate band, so this profit is taxed at 40%: £8,000.00. The basic-rate reduction is 20% of the interest, £1,800.00, because the interest is the smallest of the three caps in this particular set of numbers. Tax linked to the letting after that reduction is £6,200.00.

Cash after that illustrative tax is £4,800.00. Under the old habit of deducting interest in full, the taxable profit would have been £11,000.00 and the tax at 40% would have been £4,400.00. The extra tax in this illustration is £1,800.00, which is exactly the 20% of interest that the higher-rate position no longer shelters. That is the clean version of the story. It is clean because the property profit is larger than the interest and the salary is already in the higher band. Change either fact and the cap changes the answer. Do not tattoo £1,800.00 onto your own loan.

Why the London flat feels this more sharply

Illustration A already loses £2,020.76 of cash after interest, before any tax. If the landlord is a higher-rate taxpayer, the tax computation can still see a property profit, because the interest was not deducted, and it can still ask for the basic-rate reduction only. You can owe tax in a year the account went backwards. Whether you do depends on the caps, on losses, and on the rest of your income. The point for a cash-flow reader is modest: do not subtract interest and then also assume the tax is zero because "there was no profit". Those are different profits.

What this note will not tell you to do

It will not tell you to incorporate. A company generally deals with interest under corporation tax rules rather than Section 24, and it pays corporation tax on its profit. Moving properties in can mean stamp duty and capital gains tax, a different mortgage, and ongoing accounts. For some landlords the arithmetic works. For many, the costs of getting there swallow the tax difference. That comparison needs the actual portfolio and a tax adviser who will sign the letter.

It will not tell you to transfer a share to a spouse, to overpay the loan, or to raise the rent. Each of those changes cash, tax, and sometimes the law of the tenancy. They are decisions. This page is the reason the decision exists.

Basic-rate taxpayers often feel less of the restriction, because a 20% reduction looks like the relief they would have had anyway, but the higher profit can still push total income into the next band. That cliff is the part a gross-yield video never draws.

Where to put it on the ledger

Keep the cash ledger honest: full interest out. Then, beside it, a tax line built by someone who can see the whole return. If you are sketching alone, use a rough higher-rate illustration like the one above and label it as rough. Our three buildings stop before income tax on purpose, and they say so in the cash-after-interest line. Mixing a partial tax guess into the yield is how two readers end up quoting different "nets" for the same front door.

The UK rules page holds the stamp duty bands that sit on the other side of the purchase, the day-one cash Section 24 does not soften. You pay the stamp duty in full whether or not the interest is deductible later.