If you rent out residential property in the UK, it’s important to understand how mortgage interest is treated for tax purposes, especially since key changes came into effect in recent years.
What Is Mortgage Interest Relief?
Mortgage interest relief used to allow landlords to deduct the full amount of mortgage interest (and other finance costs) from their rental income before calculating tax. This significantly reduced their tax bills.
What Changed?
Prior to April 2020, landlords could deduct all mortgage interest and financecosts from their rental income before calculating how much tax they owed.
Since 6 April 2020, landlords can no longer deduct these costs. Instead, they receive a tax credit equal to 20% of the interest paid on their mortgage.
What Does This Mean?
You now pay income tax on the full amount of rental income, and then claim a basic rate tax credit (20%) on your mortgage interest.
Example:
- Rental income: £18,000
- Mortgage interest: £6,000
Old system (pre-2020):
You’d be taxed on £12,000 (after deducting interest).
New system:
You’re taxed on the full £18,000, but get a 20% credit on the £6,000 interest, which is £1,200 off your tax bill.
If you’re a basic-rate taxpayer, your bill might be similar. But if you’re in the higher-rate or additional-rate band, you’ll pay more tax than you used to.
Who Is Affected?
- Individual landlords (not companies).
- Applies to residential properties only.
- Doesn’t apply to landlords operating through a limited company — they can still deduct finance costs in full.
What Can You Do?
- Review your tax position annually to understand the impact of the restriction.
- Consider incorporation if you have multiple properties, but weigh the pros and cons carefully.
- If your rental income increases your taxable income into a higher tax bracket, it is advisable to seek professional financial advice.
- Keep detailed records of your finance costs to claim the correct tax credit.
Final Thoughts
The removal of full mortgage interest relief has increased the tax burden for many landlords. However, with the right strategy and support, you can still manage your rental income efficiently for tax purposes.