Mortgage Interest on a Rental Property in the UK

aafra9
Sep 4
5 min read

Mortgage Interest on a Rental Property in the UK

If you’re a landlord in the UK, one of the biggest costs you’ll face is mortgage interest on your buy-to-let property. Understanding how this interest is treated for tax purposes is essential for working out your true rental profits.

Need Expert Tax Advice? 👉 Get in touch with PKPI today for personalised landlord tax advice.

How It Worked Before 2020

Until April 2020, landlords could deduct the full cost of mortgage interest (and other finance costs) from their rental income before tax was calculated. This meant you only paid income tax on your profit after interest. For higher-rate taxpayers, this offered generous relief.

Example (Old Rules):

Rental income = £15,000
Mortgage interest = £9,000
Taxable profit = £6,000

How It Works Now (Post-2020 Rules)

Since the introduction of Section 24, the system has changed. Individual landlords can no longer deduct mortgage interest as an expense. Instead, you receive a 20% tax credit on your mortgage interest payments.

Need Expert Tax Advice? 👉 Get in touch with PKPI today for personalised landlord tax advice.

Example (Current Rules):

Rental income = £15,000
Mortgage interest = £9,000
Taxable income = £15,000 (interest not deducted)
If you pay 40% tax:
Tax on £15,000 = £6,000
Mortgage interest credit = £9,000 × 20% = £1,800
Final tax bill = £4,200

Who Is Affected Most?

Basic-rate taxpayers (20%) → Minimal impact. The 20% credit roughly offsets the tax.
Higher-rate (40%) and additional-rate (45%) taxpayers → Pay more tax, as they only receive relief at the basic rate.

What About Limited Companies?

If your rental property is owned through a limited company, the old rules still apply. Mortgage interest is treated as a business expense and can be deducted in full before corporation tax is calculated. This is one reason many landlords now consider using a company structure, though it comes with extra costs and considerations.

Need Expert Tax Advice? 👉 Get in touch with PKPI today for personalised landlord tax advice.

Can You Deduct Mortgage Interest on a Rental Property in the UK?

No, you can’t deduct mortgage interest directly from your rental income anymore. Since April 2020, UK landlords are no longer allowed to treat mortgage interest as a deductible expense when calculating rental profits. Instead, you receive a 20% tax credit on the mortgage interest you pay each year.

👉 Example:

Rental income = £12,000
Mortgage interest = £6,000
Taxable income = £12,000 (interest not deducted)
Tax at 40% = £4,800
Mortgage interest relief = 20% of £6,000 = £1,200
Final tax bill = £3,600

This change mainly affects higher-rate taxpayers, who now only get relief at the basic 20% rate, instead of their higher tax rate.

Exception: If the property is owned through a limited company, mortgage interest is still treated as a business expense and can be deducted in full before corporation tax is applied.

Individual landlords → No full deduction, only a 20% tax credit.

Limited companies → Full deduction allowed.

Need Expert Tax Advice? 👉 Get in touch with PKPI today for personalised landlord tax advice.

1. Can landlords deduct mortgage interest from rental income in the UK?

No, not anymore. Before April 2020, landlords could deduct all mortgage interest from rental income before calculating taxable profits. This significantly reduced their tax bills. However, the rules changed under Section 24 of the Finance Act 2015, and now mortgage interest can no longer be deducted directly. Instead, landlords receive a flat-rate 20% tax credit, regardless of their income tax band.

2. What is the mortgage interest tax credit?

The tax credit is a flat 20% relief applied to the total mortgage interest you pay. For example, if you pay £6,000 in mortgage interest in a year, you will receive a £1,200 credit against your tax bill. This system is less generous than the old one, especially for higher-rate taxpayers, but it ensures that all landlords get at least some relief.

3. Does the tax credit benefit higher-rate taxpayers?

Not fully. Under the old system, higher-rate taxpayers (40% or 45%) could deduct mortgage interest at their tax rate. Now, the relief is capped at the basic rate (20%). This means higher-rate taxpayers pay significantly more tax than they did before 2020, making buy-to-let less tax-efficient in personal names.

4. Can I deduct mortgage interest if I own property through a limited company?

Yes. If you set up a limited company to hold your rental property, mortgage interest is still treated as a business expense. This means it is fully deductible from rental income before corporation tax is calculated. Many landlords have incorporated to take advantage of this, though it comes with extra costs such as accounting fees and potential tax implications on dividend withdrawals.

5. How does this change affect my rental profits?

Your taxable profit looks artificially higher because mortgage interest is no longer deducted as an expense. For example, if you earn £15,000 in rent and pay £10,000 in mortgage interest, your taxable profit is still £15,000, not £5,000. The tax credit helps reduce your bill, but you may still end up paying more tax, and you could even be pushed into a higher tax bracket.

6. Do these rules apply to all landlords?

Yes, they apply to individual landlords of residential rental properties in the UK. This includes buy-to-let properties. The rules don’t apply to landlords operating through limited companies or to those letting commercial property.

7. Are buy-to-let mortgage costs affected?

Yes. The rule specifically impacts residential buy-to-let mortgages. Any interest you pay on these loans is no longer deductible but instead covered by the 20% tax credit system. This has reduced profitability for many small landlords with personal buy-to-lets.

Need Expert Tax Advice? 👉 Get in touch with PKPI today for personalised landlord tax advice.

8. Does this rule apply to commercial property?

No. The restriction only applies to residential property. If you own commercial property (like offices, shops, or warehouses), you can usually still deduct your mortgage interest as a business expense. This difference is one reason some investors are shifting from residential to commercial property investments.

9. Can I deduct other property expenses?

Yes. You can still deduct legitimate expenses such as letting agent fees, repair and maintenance costs, property insurance, ground rents, and service charges. These reduce your taxable profit. The only major change has been the restriction on mortgage interest relief.

10. Is it worth switching to a limited company for tax benefits?

It can be, but it depends on your situation. A limited company allows full deduction of mortgage interest and may also benefit from lower corporation tax rates. However, there are downsides:

Extra costs for setting up and running a company.
Higher mortgage rates for company buy-to-let loans.
Potential double taxation when taking profits out as dividends.

For landlords with one or two properties, staying as an individual may still be simpler. For those with larger portfolios, incorporation could be more tax-efficient. It’s best to speak with a qualified tax advisor before making the decision.

Mortgage interest on a rental property in the UK no longer reduces your taxable rental income if you own it personally — but you do get a 20% tax credit. Owning through a company can preserve full deductibility, but it’s important to weigh up the pros and cons before restructuring.

📢 Need Expert Tax Advice?

At pkpi.uk, our tax specialists can guide you through the complexities of mortgage interest relief, property ownership structures, and landlord tax planning. Whether you own one property or a whole portfolio, we’ll help you minimise your tax bill and make the most of your investment.

👉 Get in touch with PKPI today for personalised landlord tax advice.