Section 24 and holiday lets: the mortgage-interest test a higher-rate taxpayer needs to run

If you are considering a UK holiday let in your own name and expect to use a mortgage, the question is not simply whether projected bookings cover the lender payment.

For Income Tax purposes, the former furnished holiday lettings (FHL) regime ceased from 6 April 2025. After that change, an individual landlord can still obtain relief for eligible finance and mortgage-interest costs, but generally at the basic rate of Income Tax — currently 20% — rather than by deducting those costs in full when calculating property profit. Companies are not subject to these finance-cost restriction rules. (gov.uk)

That change does not make personal ownership automatically unviable. It does mean that a highly leveraged purchase can look very different once cash flow and tax are modelled separately. For a higher-rate taxpayer, mortgage interest remains a real cash cost, while the tax calculation may initially include property profit before the restricted finance costs are relieved.

This is a general decision framework, not a recommendation or a calculation for a particular buyer. It uses illustrative assumptions only. Tax treatment depends on the facts, including the nature of the activity, ownership, borrowing, other income and the tax year.

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Video guide

Section 24 and Holiday Lets: Does Mortgage Interest Make Personal Ownership Unviable for a Higher-Rate Taxpayer?

Watch the practical walkthrough, then use the evidence checklist below to test the property before making an offer.

Watch videoOpen Deal Checker

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The post-6 April 2025 starting point

Before the repeal, qualifying FHLs had access to specific tax reliefs. From 6 April 2025 for Income Tax and Capital Gains Tax purposes, those specific FHL provisions no longer apply. HMRC says the repeal does not itself require an owner to change the way they rent the property, and it does not change VAT, Council Tax or business-rates rules. It does, however, remove the old FHL distinction for finance-cost treatment. (gov.uk)

It is important not to overstate the position. A short-stay property is not automatically given a tax result merely because it is marketed as holiday accommodation. HMRC says the character of income depends on the nature of the activity and how profit is derived; where profit is derived from exploiting land, it is property income. (gov.uk)

For the common case of an individual carrying on a property business involving the letting of a dwelling-house, the finance-cost restriction is the issue to understand. HMRC’s manual says that the restriction applies to interest and other finance costs on loans for an individual property business involving residential properties. Companies carrying on a property business are not affected by this particular restriction. (gov.uk)

In practical terms, do not build a personal-ownership forecast on the assumption that 100% of mortgage interest reduces taxable property profit before Income Tax is calculated simply because the property will be used for short stays.

Why cash profit and taxable property profit can diverge

A sound review keeps two distinct calculations.

1. Cash available before Income Tax

This is the operational cash view. It shows whether income received is sufficient to meet real cash commitments during the year.

A conservative annual model may include:

• booking income actually received, or clearly stated occupancy and average-rate assumptions;
• booking-platform, card-processing, management and guest-service charges;
• cleaning, laundry, linen and consumables;
• utilities, broadband, insurance, maintenance and compliance costs;
• local property charges and any relevant licensing-related costs;
• a repairs and replacement allowance;
• mortgage interest; and
• mortgage capital repayment as a separate cash item.

The point of this line is liquidity. It should also allow for voids, owner use, refunds, cancellations and the possibility that off-season income is weaker than the headline annual forecast.

2. Property profit before restricted finance-cost relief

This is the tax-model view. For an individual within the finance-cost restriction, start with relevant property income less allowable non-finance expenses. Restricted residential finance costs are not deducted at this stage. The resulting property profit then enters the owner’s wider Income Tax calculation, with the finance-cost reduction considered afterwards. (gov.uk)

The distinction matters because a borrower can have modest cash left after interest but a materially larger property-profit figure for Income Tax purposes.

How the 20% finance-cost reduction works

The tax reduction is not necessarily 20% of every pound of interest paid. HMRC describes it as the basic-rate value — currently 20% — of the lowest of:

1. eligible finance costs not deducted from property income in the tax year, plus applicable brought-forward finance costs;
2. property-business profits after brought-forward property losses; and
3. adjusted total income above the Personal Allowance, excluding savings and dividend income.

The reduction cannot create a tax refund. Where the reduction is limited by property-business profits or adjusted total income, relevant unused finance costs can be carried forward under the rules. (gov.uk)

That is why a spreadsheet should be treated as a screening tool rather than a final tax computation. The result can be affected by other property income, property losses, joint ownership, partnerships, reliefs, the owner’s wider income and the purpose of each borrowing.

HMRC also says that where a property business includes both dwelling-house and other lettings, interest has to be considered by reference to the purpose and use of the borrowing. Any apportionment must be just and reasonable. (gov.uk)

A deliberately simple illustration

The following is illustrative arithmetic only. It is not a forecast, a tax return calculation or a recommendation.

Assume that, in one tax year, a personally owned holiday let has the following figures:

The cash position before Income Tax and before capital repayment is £12,000:

£45,000 − £15,000 − £18,000 = £12,000

For this simplified finance-cost comparison, the starting property-profit figure is £30,000:

£45,000 − £15,000 = £30,000

The £18,000 interest has not been deducted at that stage.

Now add assumptions solely for illustration:

• the owner has sufficient adjusted total income above their Personal Allowance;
• the full £30,000 falls within a 40% marginal Income Tax position;
• no property losses, other reliefs or statutory limits change the calculation; and
• the whole £18,000 qualifies for, and can be used in, the finance-cost reduction calculation.

The simplified incremental Income Tax on £30,000 at 40% is £12,000. A 20% finance-cost reduction on £18,000 is £3,600. The simplified incremental tax result is therefore £8,400.

£12,000 − £3,600 = £8,400

Against the £12,000 cash position before Income Tax, that leaves £3,600 before scheduled mortgage capital repayment, acquisition costs, major works or other owner-level cash demands.

The useful point is not that £8,400 will be anyone’s real tax bill. Income Tax is calculated across a person’s full circumstances. The point is the gap: in this narrowly stated illustration, relief for £18,000 of interest is worth £3,600, not £7,200. A higher-rate taxpayer therefore needs to model the restricted relief separately rather than treating interest as a full pre-tax deduction.

A different result may arise where income falls in another band, the owner is Scottish for non-savings Income Tax purposes, tax thresholds are crossed, or the statutory “lowest of” test limits the reduction.

Six tests before calling the deal cash-flow positive

1. Reserve for tax from the tax model, not the leftover cash figure

Build a tax-reserve line from property income less relevant non-finance expenses. Apply the finance-cost reduction separately, with the statutory limits shown rather than hidden.

Run at least three scenarios:

• a base case using documented, conservative operating assumptions;
• a downside trading case with lower income and costs that do not reduce in proportion; and
• a rate-reset case using a higher interest-cost assumption for a variable rate, product expiry or refinance.

The practical question is whether cash remains after operating costs, interest, the estimated tax reserve, capital repayment and an allowance for unexpected expenditure. A result that works only at peak occupancy or only at an introductory mortgage rate is not a resilient cash-flow case.

2. Separate mortgage interest from capital repayment

A repayment mortgage has two separate cash effects. Interest may be an eligible finance cost subject to the restriction. Capital repayment reduces cash, but it is repayment of loan principal rather than an Income Tax deduction.

Show both figures in every scenario:

• cash after interest and estimated tax; and
• cash after interest, estimated tax and scheduled capital repayment.

This does not judge whether repayment borrowing is suitable. It prevents a routine modelling error: treating the total lender payment as though it has one tax treatment.

3. Test the owner’s wider income position

Property profit before restricted finance-cost relief may affect tax bands and allowances even if cash after interest is modest. In the 2026/27 tax year, the standard Personal Allowance is £12,570. It is reduced by £1 for every £2 of adjusted net income above £100,000 and is nil at £125,140 or above. For England, Wales and Northern Ireland, the higher-rate band begins above £50,270 of taxable income; Scotland has different non-savings rates and bands. (gov.uk)

A buyer near a band boundary, the Personal Allowance taper, or another income-related threshold should have their own position reviewed by an appropriately qualified tax professional. “Higher-rate taxpayer” is a useful warning flag, not a complete calculation.

4. Model the timing of tax payments

Annual profit is not the same as annual liquidity. For Self Assessment, payments on account are generally due on 31 January and 31 July. Each is normally half of the prior year’s tax bill, although payments on account are generally not required where the prior year’s tax bill was below £1,000 or at least 80% of tax was collected outside Self Assessment. Any balancing payment is generally due on 31 January after the tax year. (gov.uk)

This can create a material cash call: a January payment can include a balancing payment for the completed year and the first payment on account for the next year. Model the dates and build reserves from receipts; do not assume that a year-end surplus will still be available when the payment falls due.

5. Do not assume the setup budget has a simple income-tax deduction

After repeal, capital allowances are no longer available for new expenditure on fixtures, furniture or furnishings in the former FHL context. HMRC says that Replacement of Domestic Items Relief may be available when qualifying domestic items are replaced, rather than for their initial purchase. (gov.uk)

That does not mean every replacement qualifies, and it does not decide the treatment of significant building works, improvements or acquisition expenditure. Keep a separate capital-expenditure schedule. The deal model should not rely on assumed tax relief for a furnishing or refurbishment budget unless that treatment has been checked for the facts.

6. Do not use a projected loss as a liquidity plan

Where allowable expenses exceed rental income, GOV.UK says a loss can normally be set against future profits from the same rental business. Results across more than one let are normally combined in working out the overall property-business position. (gov.uk)

There is also a specific transition point for historic FHL losses: HMRC says current-year or carried-forward FHL losses become losses of the ongoing UK or overseas property business after repeal. (gov.uk)

Neither point supports an assumption that an early trading shortfall will automatically produce an immediate repayment that can fund interest, repairs or lender payments.

Does Section 24 make personal ownership unviable?

No. A universal answer would be misleading.

Personal ownership can still have positive post-tax cash flow under a set of assumptions. Equally, a heavily mortgaged property that appears attractive on gross income or pre-tax cash flow can become thin once restricted finance-cost relief, tax-payment timing, capital repayment, maintenance and downside trading are included.

The decision-useful test is not “does the mortgage fit inside expected bookings?” It is:

After realistic operating costs, mortgage interest, a constrained finance-cost relief calculation, tax-payment timing, capital repayment and downside assumptions, is there sufficient cash for the owner’s stated plan?

A company is not an automatic answer. It is true that companies are outside this particular finance-cost restriction, but company ownership has different tax, funding, administration, extraction, legal and mortgage considerations. That comparison needs fact-specific professional advice; it should not be treated as a shortcut or recommendation. (gov.uk)

Information to assemble for a conservative review

Before progressing a personally owned, mortgaged holiday let, gather:

1. purchase price, deposit, acquisition-cost budget and intended ownership shares;
2. mortgage offer or illustration, loan amount, payment type, interest rate, reversion rate, fees and refinance date;
3. annual interest expected in each tax year, separately from capital repayment;
4. income assumptions with peak and off-peak periods, voids, owner use and refunds shown explicitly;
5. a full operating-cost schedule, including management, cleaning, utilities, insurance, repairs and replacement allowance;
6. expected other taxable income and any likely tax-threshold exposure;
7. a calendar for Self Assessment payments and an available cash reserve; and
8. professional review where there are other properties, losses, joint ownership, mixed-use borrowing, overseas income or other complexity.

If a Holiday Let Investor Deal Checker is available for your circumstances, use it only as a conservative screening exercise and confirm that its inputs reflect your mortgage terms and tax assumptions. It does not replace tax, mortgage, legal or financial advice.

Disclaimer: This article is general information only and is not legal, tax, mortgage, planning, valuation, financial or investment advice. Tax rules and personal circumstances vary. The illustrations are simplified and are not forecasts or recommendations. Seek advice from appropriately qualified professionals before making a purchase, finance, ownership-structure or tax-return decision.