Introduction: What Section 24 Mortgage Interest Rules Mean for Americans
Section 24 mortgage interest rules have changed the economics of British buy-to-let more than any other reform of the last decade. Since April 2020, individual landlords can no longer deduct mortgage interest from their rental profits. Instead, they receive a tax reduction worth just 20% of the interest. For a higher-rate or additional-rate landlord, that means paying tax on income that does not exist in cash terms.
For an American who owns a British rental property, the damage runs deeper still. The IRS never adopted anything like section 24. On a US return, mortgage interest on a rental is fully deductible, and depreciation reduces the profit further. Consequently, the same flat can show a large taxable profit to HMRC and a loss to the IRS in the same year. The UK tax then has nothing to offset in America, and the foreign tax credit sits unused.
Every page currently ranking for section 24 mortgage interest is written for a British landlord with one tax authority. The longest runs to roughly 5,000 words and never mentions US tax. The handful of US-facing pages mention the mismatch in a sentence, and the most detailed dates from 2017, before the restriction was even fully phased in. In our experience working with bankers, founders and senior professionals who own London property, this gap is one of the most expensive blind spots in cross-border tax.
This guide therefore explains the section 24 mortgage interest restriction as HMRC applies it in 2026/27, the rate increase due in April 2027, the US rules that produce the opposite answer, and what happens to the stranded UK tax. It covers both Americans living in Britain and Britons living in America who kept a UK property. Finally, a real-number case study shows exactly how much the mismatch costs, and how to recover it.
Section 24 Mortgage Interest in One Paragraph
Section 24 of the Finance (No. 2) Act 2015 inserted a finance cost restriction into the UK's property income rules. It applies to individuals, partnerships of individuals and trustees letting residential property. Companies are outside it. Rather than deducting interest, arrangement fees and other finance costs, the landlord adds them to a pool and receives a basic-rate tax reduction. HMRC's own guidance on restricting finance cost relief for individual landlords summarises the change.
Why US Owners Are Hit Harder Than British Landlords
A British landlord pays more tax under section 24, but only once. An American landlord pays the higher UK tax and then discovers that the IRS calculates the rental profit very differently. Because US profit is lower, the US tax that the UK credit could offset is lower too. As a result, the extra UK tax caused by section 24 mortgage interest rules is often a permanent cost unless it is carried forward and used correctly.
How the Section 24 Mortgage Interest Restriction Works in 2026/27
The mechanics sit in section 272A of the Income Tax (Trading and Other Income) Act 2005, which disallows finance costs as a deduction, and in the tax reduction rules that replace them. HMRC explains the detail in the Property Income Manual at PIM2054.
What Counts as a Finance Cost
Finance costs include mortgage interest, interest on loans to buy furnishings, arrangement and broker fees, and the costs of repaying a loan early. Therefore, almost every borrowing cost connected with a residential let falls within the restriction. Notably, the restriction applies to overseas residential lettings as well as UK ones, so a UK-resident American with a Florida condo is caught too.
The 20% Tax Reduction and Its Three Limits
The tax reduction equals the basic rate, currently 20%, of the lowest of three figures. HMRC's calculation guidance at PIM2058 lists them: the finance costs for the year plus any brought forward; the property business profits after losses; and your adjusted total income above the personal allowance, excluding savings and dividends.
Consequently, where the property makes a small profit or a loss once interest is ignored, part of the relief is deferred. Any unrelieved finance costs carry forward indefinitely against future property profits. HMRC's worked case studies on how the relief is calculated show the carry-forward in action.
The Rate Rise on 6 April 2027
From 6 April 2027, property income in England, Wales and Northern Ireland will be taxed at its own rates of 22%, 42% and 47%. Importantly, the section 24 mortgage interest credit rises only to 22%. HMRC's technical note on the new property income rates confirms both figures. For an additional-rate landlord, the gap between the rate on rent and the rate of relief stays at 25 points, 47% against 22%. However, the higher rate applies to the whole rental profit, while the extra two points of relief apply only to the interest, so the overall bill still rises.
How the IRS Treats the Same Mortgage Interest
The US starts from the opposite premise. Rental property is an income-producing activity, so its costs are deductible against its income on Schedule E. IRS Publication 527 on residential rental property sets out the rules, and they apply in exactly the same way to a flat in London as to a house in Ohio.
Full Deduction for Interest
Mortgage interest on a loan used to buy, improve or refinance a rental property is deductible in full, with no cap. Similarly, loan arrangement fees are amortised over the life of the loan. As a result, the US rental profit is calculated after the interest that the section 24 mortgage interest rules strip out in Britain.
Depreciation Makes the Gap Wider
The US also requires depreciation of the building. For a residential rental property outside the United States placed in service after 2017, section 168 of the Internal Revenue Code prescribes the alternative depreciation system over 30 years. Property placed in service earlier generally used 40 years. IRS Publication 946 explains the calculation. The UK gives no equivalent relief for residential buildings, which we explain in our guide to UK rental depreciation under US tax rules.
Therefore, a typical leveraged London flat can show a UK taxable profit of tens of thousands of pounds and a small US loss in the same year.
Passive Activity Losses Are Suspended
A US rental loss, however large the interest that section 24 mortgage interest rules ignore in Britain, does not usually reduce your other income. Under section 469, rental activities are passive, and the $25,000 allowance for active participants phases out completely once modified adjusted gross income reaches $150,000. IRS Publication 925 explains the rules. For most high-net-worth owners, the loss is suspended and carried forward until the property is sold.
The Double Tax Problem: Stranded UK Tax
This is where the section 24 mortgage interest mismatch becomes expensive. The foreign tax credit exists to prevent double taxation, but it can only offset US tax that actually arises on the same category of foreign income.
Why the Foreign Tax Credit Cannot Absorb the UK Tax
Rent from a UK property is UK-source income, and Article 6 of the US-UK income tax treaty gives Britain the primary right to tax it. America then credits the UK tax on Form 1116, but only up to the US tax on that income. When the US profit is nil or negative, the limitation is nil too. The UK tax paid because of section 24 mortgage interest rules therefore produces no current US benefit.
Under section 904(c), unused credits can be carried back one year and forward ten years in the same category. Consequently, the UK tax is not necessarily lost, but it must be tracked accurately and used within that window.
Basket Placement and the High-Tax Kickout
Rental income from tenants, including income hit by section 24 mortgage interest rules, is normally passive category income. However, where the UK tax on that income exceeds the highest US rate of 37% measured against the US figure, the high-tax kickout moves it to the general category automatically. Because section 24 inflates the UK tax while depreciation deflates the US income, this is common. As a result, your excess credits may sit in the general basket rather than the passive one, which changes what they can later offset.
The Credits You Need When You Sell
The good news is that a sale usually rescues the stranded credits. A gain on UK real property is UK-source income regardless of where you live, and it carries a large US tax charge because the IRS taxes the depreciation you claimed at up to 25%. Therefore, the credits carried forward from section 24 mortgage interest years can offset the US tax on the eventual sale, provided the sale falls within ten years and the basket placement lines up. In addition, the suspended passive losses are released in full on a sale to an unrelated buyer.
Section 24 Mortgage Interest on a US Rental Property
The restriction is not limited to British bricks and mortar. It applies to every residential property business an individual UK resident carries on, including one abroad. Consequently, an American living in London who kept a rental home in Boston or Austin faces the section 24 mortgage interest rules on that US property too.
The Overseas Property Business
HMRC treats all your foreign lettings as a single overseas property business, separate from any UK letting business. Losses in one cannot be set against profits in the other. However, the finance cost restriction applies in exactly the same way: the US mortgage interest is disallowed, and you receive a basic-rate tax reduction instead. Therefore, the UK computes a large profit on a property that the IRS may treat as loss-making.
Which Country Taxes First
For a US property, Article 6 of the treaty gives America the primary right to tax the rent, because the property is located there. Unlike most other income for a UK-resident American, the treaty's re-sourcing rules cannot shift this income to Britain. Accordingly, the IRS taxes the rent first, and HMRC gives credit for US tax, including state income tax in most cases. Because US tax on a leveraged, depreciated property is often nil, there is little or nothing for Britain to credit, and the UK charge, inflated by section 24 mortgage interest rules, stands in full.
In other words, the credit that normally protects you runs the wrong way. On a UK property the IRS gives credit for UK tax; on a US property HMRC gives credit for US tax. In both cases, the country that ignores the interest ends up collecting the most.
The FIG Regime Changes the Picture for New Arrivals
If you moved to Britain after at least ten consecutive years abroad, the four-year foreign income and gains regime may exempt your US rent from UK tax for the years you claim it. HMRC's guidance on the 4-year FIG regime explains the conditions. However, a claim also sets the relief for overseas finance costs to nil for that year and cancels the carry-forward, and you lose your personal allowance. Consequently, a FIG claim is not automatically beneficial for a heavily mortgaged US rental.
Timing, Currency and Tax-Year Mismatches
Even when the income and the credit line up in principle, the two systems measure them over different periods and in different currencies. These mismatches add a second layer of cost to the section 24 mortgage interest problem.
Different Tax Years
The UK tax year runs from 6 April to 5 April, while the US uses the calendar year. Rent received in February 2026 falls in the UK's 2025/26 year and in the US 2026 year. Accordingly, the UK tax attributable to a calendar year must be apportioned across two UK returns before it can be claimed on Form 1116. Many preparers simply copy the UK liability for the tax year ending in April, which misallocates credits between years.
Payments on Account
UK landlords with significant rental profit make payments on account in January and July. Those payments relate to the current UK year but are paid before the liability is final. If you claim credits on a cash basis in the US, the timing of those payments can push credits into the wrong year. Electing to claim credits on an accrual basis often aligns the two systems more closely, although the election is binding once made.
Currency Conversion
The IRS requires rental income and expenses to be translated into dollars, typically at the IRS yearly average exchange rate for recurring items, while the UK tax is translated at the rate for the date it is paid or accrues. As sterling moves, the dollar value of the UK tax and the dollar value of the income can drift apart. Therefore, a carryforward schedule should always record both the sterling and the dollar figures for each year.
Americans Living in Britain Versus Britons Living in America
The same property produces very different section 24 mortgage interest results depending on where the owner lives. Two situations dominate our client work.
US Citizens Resident in the UK
A US citizen living in London pays UK tax on the rental profit at their marginal rate, which for our clients is usually 40% or 45%. Accordingly, the section 24 mortgage interest restriction bites at its hardest. They also face UK tax on their salary, which usually generates excess credits in the general basket already. Consequently, the stranded rental credits often have nowhere to go until the property is sold.
British Nationals Resident in the US
A Briton who moved to New York and kept a London flat is a non-resident landlord. Unless HMRC has approved gross payment, the letting agent or tenant must withhold 20% basic-rate tax under the non-resident landlord scheme. Our guide to stopping the 20% non-resident landlord withholding explains the process.
Importantly, a non-resident with only UK rental income usually pays UK tax at the basic rate. In that case, the section 24 mortgage interest credit at 20% roughly equals the rate on the rent, and the restriction costs very little. A British national also keeps the personal allowance under section 56 of the Income Tax Act 2007, whereas a US-only national who is non-resident does not.
The Personal Allowance Difference
Consider a London flat earning £40,000 of rent with £5,000 of expenses and £20,000 of interest. A non-resident British national deducts the £12,570 allowance, pays 20% on £22,430, and then takes a £4,000 credit, leaving about £486 of UK tax. A non-resident US-only national has no allowance, pays 20% on £35,000, and after the same credit owes £3,000. Nationality, not the property, drives that difference.
Case Study: A London Managing Director With Three Flats
Consider a US citizen who has lived in London since 2016 and works as a managing director in private equity. In 2019 they bought three flats in their own name for a total of £1,500,000, when £1 bought $1.28. The flats now produce £90,000 of rent a year, with £12,000 of letting costs and £45,000 of mortgage interest.
The UK Calculation
Under section 24 mortgage interest rules, the UK property profit is £78,000, because the interest is ignored. At 45%, the tax is £35,100. The tax reduction is 20% of £45,000, which is £9,000, so the UK tax is £26,100. Before section 24, the same flats would have produced a profit of £33,000 and tax of £14,850. The restriction therefore costs £11,250 a year. From 2027/28, the figures become 47% on £78,000, less 22% of £45,000, which is £26,760.
The US Calculation
In dollars, at the IRS yearly average rate of 0.759 for 2025, the rent is $118,577, letting costs are $15,810 and interest is $59,289. Depreciation on the buildings, taken as 70% of the $1,920,000 cost over 30 years, is $44,800. The US result is a loss of $1,322. Because the client's income is far above $150,000, the loss is suspended. The US tax on the rental activity is nil, and so is the net investment income tax.
What Happens to the UK Tax
The client paid £26,100, about $34,387, to HMRC. None of it offsets any US tax in 2025. Their previous adviser had simply entered the UK tax on Form 1116 without a carryforward schedule, and the software had silently expired older credits. We rebuilt six years of carryforwards, identified $162,000 of UK tax still within the ten-year window, and mapped it against the projected US tax on a sale of the flats. When the client sells, those credits are expected to eliminate most of the US tax on the gain and the depreciation recapture.
Options for Reducing the Section 24 Mortgage Interest Cost
There is no single fix for the section 24 mortgage interest cost, and several popular British solutions create new US problems. Every option needs modelling on both returns.
Holding Through a UK Company
Companies are outside the section 24 mortgage interest restriction and deduct interest in full, which is why many British landlords incorporate. For an American, however, a UK company owned more than 50% by US persons is a controlled foreign corporation, bringing annual Form 5471 filings and potential current US taxation of its rental income. In addition, a company that mainly lets property is usually a close investment holding company paying 25% corporation tax. Our guides to incorporation relief for American landlords and close investment holding companies explain the trade-offs.
Sharing Ownership With a Spouse
If your spouse pays UK tax at a lower rate, holding the property jointly can move rental profit into their basic-rate band, where the section 24 mortgage interest credit almost matches the tax rate. A Form 17 declaration can split the income according to actual beneficial ownership. However, transfers to a non-US spouse raise US reporting questions, which our guide to the Form 17 declaration for joint property covers.
Paying Down the Mortgage
Reducing debt cuts the finance costs, and therefore the section 24 mortgage interest disallowance, directly. For an American, though, repaying a sterling mortgage can trigger a US currency gain under section 988 when the pound has weakened since the loan was taken out. Our guide to foreign mortgage currency gains explains how to calculate it. Therefore, time any large repayment with the exchange rate in mind.
Furnished Holiday Lets No Longer Escape
Until April 2025, furnished holiday lettings sat outside the restriction. That regime has now been abolished, so former holiday lets fall under the same section 24 mortgage interest rules as ordinary buy-to-lets. We explain the transition in our guide to the abolition of furnished holiday lettings.
Common Section 24 Mortgage Interest Mistakes on US Returns
In our experience reviewing returns prepared elsewhere, the same errors appear again and again. Each one either overstates US tax or throws away UK credits that the section 24 mortgage interest rules have already made expensive.
Copying the UK Profit Onto Schedule E
The most common mistake is to take the UK rental profit, convert it to dollars and report it on Schedule E. That figure excludes the mortgage interest and contains no depreciation, so it overstates US income, sometimes by more than the whole rent. Consequently, the client pays US tax, or NIIT, on income the IRS would never have taxed. Worse still, the omitted depreciation is still treated as "allowed or allowable" when the property is sold, so the recapture charge arrives anyway.
Treating the Section 24 Credit as a Deduction
Some preparers try to reflect the section 24 mortgage interest tax reduction on the US return, either by reducing the UK tax claimed or by deducting only 20% of the interest. Both are wrong. The US deducts the full interest under its own rules, and the creditable UK tax is the actual UK liability after the tax reduction. Mixing the two systems produces figures that match neither.
Losing the Carryforward Schedule
Finally, many clients arrive with no record of their unused credits. Tax software usually tracks carryforwards only if the prior-year data was entered in the same package, and a change of preparer often breaks the chain. Because unused credits expire after ten years, a missing schedule can quietly destroy tens of thousands of dollars of relief. Rebuilding it from old returns is laborious, but it is almost always worthwhile for a landlord with several years of section 24 mortgage interest exposure.
Reporting on Both Sides of the Atlantic
The section 24 mortgage interest mismatch also doubles the reporting workload. Each return needs its own computation, in its own currency and its own tax year.
UK Returns and Making Tax Digital
UK rental income goes on the SA105 property pages, with the finance costs entered separately so that HMRC can compute the tax reduction. Making Tax Digital for income tax became mandatory from April 2026 for landlords with gross income above £50,000. However, HMRC's guidance on when you need to use Making Tax Digital confirms a deferral to April 2027 for anyone who filed the SA109 residence pages, which covers most American filers.
US Returns
On the US side, the property goes on Schedule E, with depreciation on Form 4562, passive activity limits on Form 8582 and the credit on Form 1116, including the carryforward schedule. The UK bank account that receives the rent must also appear on your FBAR once your foreign accounts together exceed $10,000.
If You Have Missed UK or US Filings
Many Americans who inherited or bought a UK property never filed UK returns on the rent, or never reported it to the IRS. HMRC's Let Property Campaign offers a structured route to disclose missed UK tax, which our guide to the Let Property Campaign for missed UK tax returns explains. On the US side, unreported rent and missed FBARs can often be corrected together.
How TaxYork Can Help
TaxYork prepares US and UK returns for Americans who own British rental property, and for Britons in America who kept a home in the UK. We calculate the section 24 mortgage interest tax reduction correctly, prepare the US Schedule E with the right depreciation method, and build a Form 1116 carryforward schedule so that no UK tax expires unused.
Furthermore, we model the options before you act: incorporation, joint ownership, refinancing and sale timing. Our US tax returns for expats service covers the full annual cycle, and our FBAR and FATCA reporting team handles the accounts that receive your rent.
Conclusion
The section 24 mortgage interest restriction taxes British landlords on income they never receive, and it hits Americans twice as hard. HMRC ignores the interest and gives a 20% credit, rising to 22% in 2027. The IRS deducts the interest and depreciation in full, often producing a loss. As a result, the UK tax has nothing to offset in America and sits as a credit carryforward.
That carryforward is valuable, but only if it is tracked, kept in the right basket and used within ten years, ideally against the US tax on an eventual sale. Handled carefully, the cross-border cost of section 24 mortgage interest rules can be recovered rather than written off.
Contact Us
If you own a UK rental property and file US returns, book a consultation with our US-UK specialists. We will review your UK and US figures, rebuild your credit carryforwards and show you exactly what section 24 is costing you.
Email hello@taxyork.com or call 020 3488 8606 to speak to the team.
Disclaimer
This article provides general information about the UK finance cost restriction and US taxation of rental property for Americans and Britons with cross-border property, and does not constitute tax, legal or investment advice. Tax rules change frequently and their application depends on your individual circumstances. You should obtain professional advice tailored to your situation before acting on any information in this article. TaxYork accepts no liability for actions taken or not taken on the basis of this content.