1. Introduction: A Turning Point for UK Residential Landlords
For years, UK residential landlords operated under the familiar regime of Section 24 Finance Act 2015 — which phased out the ability to deduct mortgage interest and other finance costs as allowable expenses, replacing them with a basic rate tax credit. But a fresh shift is now upon them: from the tax year starting 6 April 2026, a new structure will apply across the board—a flat-rate 20% landlord tax credit aimed at simplifying (and standardising) the treatment of finance costs.
The question on every landlord’s lips: what exactly changes, how to prepare, and what strategy adjustments might be necessary? This article walks through the reforms line-by-line and spotlights the practical implications.
2. The Backdrop: Why Section 24 Needed Reform
2.1 Recap of Section 24
Under Section 24 (Phase 1, 2017/18 to 2019/20; Phase 2, 2020/21 to 2023/24; Phase 3, 2024/25 onwards), landlords could no longer deduct all of their mortgage interest and other finance costs in computing their rental profits. Instead:
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Finance costs were added back to rental profits,
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Landlords then received a tax credit equal to 20% of those finance costs, applied against their Income Tax liability.
Landlords with higher rate tax liabilities (40% or 45%) saw a significant squeeze on profitability.
2.2 Why Change Was Considered
Several criticisms mounted over time:
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Complexity for landlords and their accountants.
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Discrepancies in tax treatment between private individual landlords and corporate (Ltd) landlords.
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Perceived unfairness to individual landlords relative to companies who could still deduct finance costs.
The government responded with a new, cleaner approach — the flat-rate 20% credit for all individual landlords — and legislated the shift within Finance (No. 2) Act 2023.
3. Overview of the 2026 Landlord Tax Credit Regime
3.1 Key Dates
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6 April 2026: New regime comes into effect for the tax year 2026/27.
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5 April 2026 and earlier: Existing Section 24 rules continue to apply.
3.2 Who It Applies To
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Individual landlords (sole traders or partnerships) receiving UK-residential rental income.
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Does not apply to corporate landlords (limited companies), which continue under separate rules.
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Relevant for landlords with UK-resident rental properties, subject to UK Income Tax.
3.3 What the Change Means
Instead of the phased reduction of allowable finance cost deductions under Section 24, the 2026 regime grants a flat-rate 20% credit applied to the full amount of eligible mortgage interest and certain finance costs. The impact is to simplify the process and make the outcome predictable.
4. Line-by-Line Breakdown of the New Rules
Rule 1: “All individual landlords may claim a flat-rate 20% tax credit for finance costs”
Where previously the allowable deduction for finance costs was eliminated and replaced with a 20 % credit only on qualifying finance costs, in the new regime the same 20% credit is directly applicable to the full amount of specified finance costs for individuals.
Rule 2: “Specified finance costs are clearly defined”
Eligible finance costs include:
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UK residential mortgage interest paid by the landlord,
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Interest on loans used wholly for the rental business,
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Interest element of finance leases (for residential property).
Costs not included are: capital repayments, costs of acquiring the property, repairs & maintenance (which remain deductible in full).
Rule 3: “Credit applies against the landlord’s Income Tax liability”
The 20% credit is used to reduce the individual landlord’s Income Tax payable on rental profits. It cannot be carried back or forward, and unlike Section 24, it is not restricted by the landlord’s marginal tax rate.
Rule 4: “Companies and corporate landlords remain outside this regime”
Limited companies earning UK residential rental income continue to deduct finance costs in the usual profits calculation and pay Corporation Tax. The 2026 credit regime is only for individuals.
Rule 5: “Transitional rules apply during the 2025/26 tax year”
For the tax year 2025/26 (6 April 2025 to 5 April 2026), landlords must work under the current Section 24 rules. This means only the existing phased deduction restriction applies and the new credit is not yet available.
Rule 6: “Record-keeping must be robust and finance cost records retained”
To claim the 20% credit, landlords must maintain accurate records of mortgage interest or other eligible finance costs, and maintain the same standard of documentation as for prior tax years — invoices, statements, loan agreements and repayments schedules.
Rule 7: “Losses carried forward under the old regime must be handled appropriately”
Losses arising under Section 24 (where finance cost deductions were restricted) that have been carried forward should continue to be integrated into profit calculations. The flat-rate credit does not affect the ability to bring forward those losses for future years.
5. What Landlords Need to Know: Practical Implications
5.1 Simplification & Predictability
The move to a fixed 20% credit removes the uncertainty of how much tax relief a landlord will receive (especially for higher-rate tax payers). It brings clarity.
5.2 Impact on Higher-Rate Tax Payers
Under Section 24, a higher-rate taxpayer could effectively only receive relief at 20% on finance costs, even though their tax rate was 40% or 45%. The new credit regime continues that 20% relief but removes the confusion of deduction vs credit. For some, this might mean slightly lower net benefit compared with full deductibility (if they had still been able to deduct — which they can’t).
5.3 Effects on Company vs Individual Ownership Structures
Individuals may find that holding residential property via a company remains beneficial if finance costs are high and profits large — given companies still deduct costs, albeit taxed at Corporation Tax rates. Landlords need to revisit structure decisions.
5.4 Cash Flow Considerations
While the credit reduces tax bills, it does not increase cash refunds beyond tax payable. Landlords with low income (and thus little tax payable) may gain less from the credit. They must assess the interaction with personal tax bands.
5.5 Portfolio Growth and Leverage
Highly leveraged landlords must model future tax bills in the new regime. Rapid portfolio growth may expose taxpayers to higher marginal tax bands without full relief for financing. Advisors will need to stress-test scenarios.
6. Transitional & Compliance Considerations
6.1 Run-Off of Section 24 Income Years
For tax years up to 5 April 2026 the Section 24 rules apply. Losses carried forward from these years must be utilised in future profit calculations. Landlords should ensure all outstanding claims (repairs, costs, allowable expenses) are made timely.
6.2 New Accounting and Filing Systems
From 2026/27, landlords must ensure their tax software, or accounting system, flags the new credit rather than deduction of finance costs. Mistakes in the first year could lead to incorrect Self Assessment filings.
6.3 Timing of Purchases and Finance Drawdowns
Landlords considering acquisitions or refinance should assess the effective tax relief. It may be beneficial to complete high-cost property acquisitions before 6 April 2026 (subject to other planning factors) to allow use of Section 24 deduction in the transitional year.
6.4 Professional Advice Is Essential
Given the structural change, landlords are well-advised to engage qualified tax professionals. In particular, those with multiple properties, mixed residential/commercial use, or portfolios held via partnerships should obtain bespoke advice from providers such as My Tax Accountant.
7. Case Studies: Illustrative Scenarios
Scenario A: Single Property, Basic-Rate Taxpayer
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Landlord A borrows £150,000 at 4% interest (£6,000/year).
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Under the new regime, he claims 20% of £6,000 = £1,200 credit.
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So the landlord receives £1,200 off their Income Tax bill (assuming they have sufficient tax to offset).
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Under Section 24 previously, only the credit route existed anyway for individuals, so effect may be minimal.
Scenario B: Multiple Properties, Higher-Rate Taxpayer
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Landlord B has two properties, paying £20,000/year interest.
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Under Section 24, high-rate tax relief was restricted to 20% of interest anyway, so the effective treatment remains broadly similar, but the new regime ensures clarity and removes layers of calculation.
Scenario C: Considering Holding via Company
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Landlord C has residential property held via Ltd Co. He deducts £30,000 interest, reduces company profits, and pays Corporation Tax (~25%).
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Post-2026, he reviews whether remaining in a company still makes sense — given the simplified 20% credit for individuals and the administrative burden of corporate structures.
8. Frequently Asked Questions
Q1: Does the 20% tax credit apply to commercial property?
No — the regime targets UK residential rental properties. Commercial property financing remains under standard tax deduction rules.
Q2: Can the tax credit be claimed for overseas property?
No — it applies only to UK-residential lettings, subject to UK Income Tax.
Q3: What happens if a landlord has no tax payable?
If there’s no tax liability (e.g., low income), the credit cannot generate a refund beyond the tax owed. Relief is only up to the tax payable.
Q4: Are repairs and maintenance still deductible in full?
Yes — day-to-day repairs, maintenance, property management costs and other standard rental expenses continue to be deductable as before.
9. What Should Landlords Do Now?
Step 1: Review Your Property Portfolio
Assess your existing properties and financing arrangements. Calculate current interest costs and benchmark likely tax credit under the new regime.
Step 2: Model Future Years
Project income, interest costs, tax bands and compare individual vs corporate structures. Understand whether refinancing or structuring changes make sense.
Step 3: Update Your Accounting Practices
Ensure your accounting system is set to record finance costs separately (for the tax credit) rather than deducting them. Prepare to apply the 20% credit from 6 April 2026.
Step 4: Secure Specialist Tax Advice
This is the time to engage an experienced tax adviser who specialises in property tax — giving landlords, partnerships and trusts bespoke guidance ahead of the transition.
10. Conclusion
The shift from the Section 24 deduction model to a flat-rate 20% tax credit marks a landmark reform in UK residential property taxation. For many individual landlords, the change brings clarity and simplification, but it also demands proactive planning — especially for portfolios that are heavily leveraged or held via corporate structures.
As the tax year 2026/27 approaches, landlords must get their affairs in order, adjust their systems, revisit their ownership structures and ensure no surprises when the new regime comes into force.
Getting ahead now — rather than scrambling later— is the sensible path. With good preparation, landlords can navigate the changes with confidence.
