Mortgage Interest Tax Relief for Landlords

The Old Rules (Before April 2017)

Before the changes, landlords could deduct mortgage interest from their rental income as an expense, just like any other cost. A higher-rate taxpayer effectively got 40% tax relief on their mortgage interest.^[1]

What Changed

The restriction was phased in between 2017 and 2020. From April 2020, the full new rules apply: no deduction for finance costs. Instead, you receive a 20% tax credit.^[1] You claim the credit when you report your property income — from April 2026, many landlords will do this through MTD Income Tax software.

How the New System Works

The calculation now works in three steps:^[1]

Calculate your property profit ignoring finance costs (rental income minus all other expenses)
Pay Income Tax on that full profit at your marginal rate
Receive a tax credit equal to 20% of your finance costs, which reduces your tax bill

What Counts as Finance Costs

The 20% tax credit applies to:^[2]

Mortgage interest payments
Interest on loans to buy furnishings or equipment for the property
Overdraft interest on a property-related account
Mortgage arrangement and broker fees

Impact on Higher-Rate Taxpayers

This is where the change really bites. A higher-rate taxpayer pays 40% tax on the full rental profit but only gets 20% relief on finance costs. The effective rate of relief is halved.^[3]

Example: You earn £20,000 rent and pay £10,000 mortgage interest. Under old rules: taxable profit £10,000, tax at 40% = £4,000. Under new rules: taxable profit £20,000, tax at 40% = £8,000, minus 20% credit on £10,000 = £2,000 credit. Tax bill: £6,000 (vs £4,000 before).

Impact on Personal Allowance

Because your rental profit is now higher (without the interest deduction), it could push your income over £100,000 — triggering the personal allowance taper and creating an effective 60% tax rate.^[3]

Companies Are Different

Limited companies can still deduct mortgage interest in full as a business expense against Corporation Tax profits. This is one reason some landlords have chosen to hold property through a company.^[4]

Thinking of incorporating? Transferring property to a company triggers Stamp Duty Land Tax and potentially CGT. Take professional advice before restructuring.

Frequently Asked Questions

Can landlords still deduct mortgage interest from rental income?

No. Since April 2020, landlords can no longer deduct mortgage interest from rental profits. Instead, you receive a tax credit equal to 20% of your finance costs, which reduces your tax bill.

How does the mortgage interest restriction affect higher-rate taxpayers?

Higher-rate taxpayers pay 40% tax on the full rental profit but only receive a 20% tax credit on finance costs. This effectively halves the relief compared to the old rules, significantly increasing the tax bill for leveraged landlords.

Can limited companies still deduct mortgage interest in full?

Yes. Limited companies can still deduct mortgage interest as a business expense against Corporation Tax profits. This is one reason some landlords have chosen to hold property through a company, though transferring triggers Stamp Duty and potentially CGT.

Can mortgage interest restriction affect my Personal Allowance?

Yes. Because your rental profit is now calculated without the interest deduction, it could push your income over £100,000, triggering the Personal Allowance taper and creating an effective 60% tax rate on income between £100,000 and £125,140.

Sources

Tax relief for residential landlords — GOV.UK
Work out your rental income — GOV.UK
Income Tax rates and Personal Allowances — GOV.UK
Property Income Manual — GOV.UK
Self Assessment: property income — GOV.UK