Section 24 — the BTL tax trap explained

Since April 2020, landlords can no longer deduct mortgage interest directly from rental income before calculating their tax bill. Instead, they receive a 20% tax credit on the interest paid. This is devastating for higher-rate (40%) and additional-rate (45%) taxpayers, who previously deducted interest at their marginal rate.

The result: many higher-rate taxpayer landlords now pay tax on income they haven’t actually received. A landlord with a £1,000 mortgage interest payment that brings their taxable profit to zero still has to pay 40% income tax on the gross rental income, with only a 20% credit offsetting it — creating a real tax liability on a property making no actual profit.

What Makes a “Good” BTL Yield in 2025?

Gross yield 5%+ is generally considered the minimum for BTL to make sense · Net yield 3–4%+ after all costs · Cash-on-cash ROI 5%+ on the deposit is a common investor benchmark. In London, gross yields are often 3–4%, making the numbers much tighter.

BTL stamp duty in 2025/26

Buy-to-let and second home purchases attract a 5% stamp duty surcharge on top of standard SDLT rates in England and Northern Ireland (increased from 3% in October 2024). This substantially increases upfront purchase costs. For a £250,000 BTL property, this adds £12,500 in additional SDLT versus a primary residence purchase.

Frequently asked questions

Is buy-to-let still worth it in 2025?
For basic-rate taxpayers and cash buyers, BTL can still generate reasonable returns in high-yield areas. For higher-rate taxpayers with mortgaged properties, Section 24 has made many investments loss-making on a tax basis even when generating rental income. Incorporating into a limited company sidesteps Section 24 (companies can still deduct mortgage interest), but comes with its own complexities: dividend extraction tax, no principal private residence relief on sale, and lenders having fewer products and higher rates for limited company BTL.
Does holding BTL in a limited company help with tax?
Yes — limited companies pay corporation tax (25% main rate, 19% small profits rate) rather than income tax, and crucially they can still deduct mortgage interest costs in full. For higher-rate taxpayers with mortgaged properties, the company structure typically produces significantly more after-tax profit. The downsides: no personal CGT annual exemption on sale, no principal private residence relief, more complex accounts, higher mortgage rates (often 0.5–1% more), and tax on extracting profit as salary or dividends. For portfolios of 4+ mortgaged properties, the company structure is usually worth the complexity.