The Section 24 mortgage interest restriction has been fully effective since April 2020. For higher-rate landlords with significant mortgage debt, it has materially increased the effective tax rate on rental income. A Special Purpose Vehicle (SPV) limited company bypasses Section 24 entirely, mortgage interest is fully deductible before corporation tax. But the SPV route has its own costs and trade-offs.
SPV = a limited company holding rental property. Mortgage interest fully deductible. Rental profit taxed at 19-25% corporation tax. Extraction via salary or dividends adds personal tax. Best for higher-rate taxpayers retaining profits in the company.
How Section 24 affects individual landlords
- Individual landlords cannot deduct mortgage interest from rental income
- Instead they receive a 20% basic rate tax credit on finance costs
- For higher-rate (40%) taxpayers the credit is worth less than the former deduction, producing a direct tax increase
- Example: �12,000 annual mortgage interest. Higher-rate landlord formerly saved �4,800. Now saves �2,400. Annual tax increase: �2,400
- Basic rate taxpayers where total income stays below �50,270: no net impact
How an SPV avoids Section 24
A company is not subject to Section 24. Rental profit equals income minus all allowable expenses including full mortgage interest. That net profit is taxed at corporation tax: 19% for profits up to �50,000; 25% above �250,000; a tapered rate between those thresholds.
When the SPV makes sense
- Higher-rate or additional-rate taxpayer with large finance costs
- Planning to retain profit in the company to reinvest rather than draw as personal income
- Buying new properties from the outset, avoiding SDLT and CGT cost of transferring existing ones
- Long-term estate-planning goal, shares can be gifted more efficiently than property
When it probably does not make sense
- Basic-rate taxpayer, the SPV generates no Section 24 benefit
- Need to draw all rental income as personal income each year
- Existing mortgaged properties, SDLT at market value plus 3% surcharge and CGT make transfer prohibitively expensive
- SPV BTL mortgage rate materially higher than the equivalent personal rate
The SPV analysis depends on your total income, mortgage rate, extraction strategy, and long-term plans. A specialist property tax accountant can model the break-even over 5-10 years before you commit.