Section 24 for Scottish Landlords: The Finance Cost Restriction Explained

Section 24 prevents individual landlords from deducting mortgage interest as a business expense. Instead, landlords receive a 20% basic-rate tax credit on finance costs. For Scottish landlords with rental profits pushing them into the 42% higher rate or above, the effective cost of the restriction is greater than for English landlords paying 40%, making the net rental yield materially worse.

How Section 24 works

Before Section 24, landlords could deduct mortgage interest from rental income before calculating tax. Now, all rental income is taxed in full, and a tax credit equal to 20% of finance costs is applied at the end of the calculation. This means a landlord who previously deducted £10,000 of interest now includes that £10,000 in taxable income and receives only a £2,000 credit.

Why Scottish rates make the impact worse

A Scottish landlord with a salary of £40,000 and rental profits pushing income above £43,662 will pay 42% on the rental profit that exceeds that threshold. Under Section 24 that profit includes the mortgage interest, which is then only relieved at 20%. The effective marginal tax cost on interest payments is the difference between the 42% rate and the 20% credit — 22p in the pound. An English higher-rate landlord faces the same calculation at 40% minus 20% = 20p in the pound.

The impact on mortgage viability

Section 24 can make previously profitable buy-to-let mortgages loss-making on a cash-flow basis. If rental income minus non-finance costs is insufficient to cover tax on the gross rental figure plus the mortgage payment, the landlord may need to subsidise the property from other income. Scottish landlords should stress-test their portfolio at 42% and 45% rates.

Incorporating to avoid Section 24

Companies are not subject to Section 24. A landlord holding property through a limited company can deduct mortgage interest in full as a business expense against rental income, paying corporation tax at 19% or 25% on the net profit. The trade-off is the 8% ADS on future acquisitions via the company, plus the tax cost of extracting profits personally. Not all landlords benefit from incorporation, but many with multiple mortgaged properties are worth reviewing.

• Gross rental income must be declared before deducting finance costs.

• A 20% tax credit is applied to total qualifying finance costs.

• Scottish landlords at 42%+ face a 22–28p effective cost per £1 of interest.

• Companies can still deduct mortgage interest in full.

Countify's non-resident and buy-to-let landlord accountants in Glasgow can model the exact impact of Section 24 on your Scottish portfolio and advise on whether incorporation makes sense.