How Do I Claim Tax Relief on Property Finance Costs

At Towerstone Accountants we provide specialist property accountant services for landlords property investors and individuals dealing with property tax and reporting obligations across the UK. This article has been written to explain How do I claim tax relief on property finance costs in clear practical terms so you understand how the rules apply in real situations. Our aim is to help you make informed decisions avoid costly mistakes and know when professional advice is worthwhile.

Property finance costs are one of the biggest ongoing expenses for landlords, and they are also one of the most misunderstood areas of UK tax. I regularly see landlords paying more tax than they expect, not because they have done anything wrong, but because they do not fully understand how mortgage interest and other finance costs are treated under current rules.

The way tax relief on property finance costs works has changed significantly over the past decade. What used to be a straightforward deduction is now a restricted tax credit for many landlords, and that change has caught a lot of people out. The good news is that relief is still available, but it must be claimed correctly, and the impact varies depending on how you own property and your wider tax position.

In this article, I will explain how tax relief on property finance costs works in the UK, who can claim it, how to claim it in practice, and how a property accountant helps ensure you are not paying more tax than necessary. This is written from real UK practice and reflects how HMRC applies the rules in the real world.

What HMRC Means by Property Finance Costs

Before looking at tax relief, it is important to be clear about what counts as property finance costs.

Property finance costs generally include:

Mortgage interest on buy to let properties

Interest on loans used to buy rental property

Interest on loans used to improve or refurbish rental property

Arrangement fees and loan fees treated as interest

Interest on overdrafts used for property purposes

What does not count are capital repayments. Only the interest element is relevant for tax relief.

How Property Finance Cost Relief Used to Work

Historically, landlords could deduct mortgage interest and other finance costs in full from their rental income before calculating tax.

This meant:

Rental profit was reduced by interest costs

Tax was paid only on the net profit

Higher rate landlords received relief at their marginal tax rate

This system changed fundamentally with the introduction of finance cost restriction rules.

The Finance Cost Restriction Explained Simply

Under current rules, most individual landlords can no longer deduct finance costs from rental income in full.

Instead, they receive a basic rate tax credit equal to 20 percent of their allowable finance costs.

This means:

Rental profit is calculated without deducting interest

Income tax is calculated on that higher profit

A tax reducer equal to 20 percent of finance costs is then applied

For basic rate taxpayers, this often makes little difference. For higher and additional rate taxpayers, the impact can be significant.

Who the Finance Cost Restriction Applies To

The restriction applies to:

Individual landlords

Landlords owning property personally

Members of partnerships that include individuals

It does not apply to:

Limited companies

Certain corporate structures

Some trustees in limited cases

Understanding which category you fall into is crucial.

Finance Costs for Personally Owned Rental Property

If you own rental property in your own name, the finance cost restriction almost certainly applies.

In practice, this means:

You do not deduct interest as an expense

You declare rental income and other allowable expenses

You calculate taxable rental profit

You then apply the basic rate tax credit

This is done through your Self Assessment tax return.

How the Basic Rate Tax Credit Works

The tax credit is calculated as the lower of:

20 percent of your allowable finance costs

20 percent of your property profits

The amount of income tax you owe on your property income

This cap is important. In loss making years or where profits are low, not all finance costs may generate relief immediately.

Unused relief can usually be carried forward.

What This Means in Real Terms

For a basic rate taxpayer, the outcome is often similar to the old system.

For a higher rate taxpayer, the difference can be stark.

Because rental profit is calculated before interest, the higher profit can:

Push you into higher rate tax

Reduce your personal allowance

Increase child benefit charges

Increase student loan repayments

The tax credit then only offsets part of that tax.

Claiming Finance Cost Relief in Self Assessment

Finance cost relief is claimed through the property pages of your Self Assessment tax return.

In simple terms:

You enter your gross rental income

You enter allowable non finance expenses

You enter finance costs in a separate section

The tax return calculates the tax credit

It is important that finance costs are entered in the correct box. Entering them as expenses is a common and costly mistake.

Types of Finance Costs You Can Claim

Allowable finance costs include:

Interest on buy to let mortgages

Interest on loans used to purchase rental property

Interest on loans used for repairs and improvements

Arrangement fees spread over the loan term

Early repayment charges treated as interest in some cases

The key test is whether the borrowing was used wholly and exclusively for the rental business.

Loans and Refinancing

Refinancing is a common area of confusion.

You can usually claim interest on loans up to the value of the property when it was first brought into the rental business.

This means:

Refinancing to replace an existing loan is usually fine

Borrowing additional funds for personal use is not

Interest must be apportioned if funds are mixed

Clear records are essential here.

Interest on Mixed Use Loans

If a loan is used partly for rental property and partly for personal use, interest must be split.

Only the portion relating to the rental business qualifies for relief.

This is an area HMRC looks at closely during enquiries.

Finance Costs and Loss Making Properties

If your rental business makes a loss, finance cost relief may not be fully usable in that year.

In this case:

Losses are carried forward

Unused finance cost relief is carried forward

Relief is applied in future profitable years

This is another reason why long term planning matters.

Jointly Owned Property and Finance Costs

Where property is jointly owned, finance costs must usually be split in line with ownership.

However, there are exceptions where:

Ownership shares are unequal

A declaration of trust exists

Income is allocated differently between spouses

A property accountant can help ensure the split is both legal and tax efficient.

Married Couples and Income Allocation

For married couples and civil partners, income from jointly owned property is normally split 50 50.

However, where ownership is unequal, it may be possible to split income differently by making a formal declaration.

This can have a significant impact on how finance cost relief is utilised.

Limited Companies and Finance Costs

If rental property is owned through a limited company, the finance cost restriction does not apply.

In a company:

Mortgage interest is a deductible expense

Profit is calculated after deducting interest

Corporation tax is paid on net profit

This is one of the main reasons landlords consider corporate structures, although there are many other factors to consider.

Incorporation Is Not a Quick Fix

Moving property into a company does not automatically solve finance cost issues.

Incorporation can trigger:

Capital gains tax

Stamp duty land tax

Mortgage refinancing costs

A property accountant can model whether the long term tax savings outweigh the upfront costs.

Furnished Holiday Lets and Finance Costs

Furnished holiday lets are treated differently from standard residential lettings.

For qualifying furnished holiday lets:

Finance costs are fully deductible

The restriction does not apply

Profits are treated as trading income

However, the qualification criteria are strict and closely monitored.

Common Mistakes I See With Finance Cost Relief

When reviewing tax returns, I regularly see the same errors.

These include:

Claiming interest as an expense instead of a tax credit

Missing finance costs entirely

Claiming interest on personal borrowing

Incorrect apportionment of mixed loans

Failing to carry forward unused relief

Each of these mistakes can lead to overpaid tax or HMRC challenges.

Record Keeping for Finance Costs

Good records are essential.

You should keep:

Mortgage statements

Loan agreements

Evidence of how borrowed funds were used

Interest calculations

Refinancing documentation

These records support your claim and protect you in the event of an enquiry.

Interaction With Other Taxes and Charges

The finance cost restriction can affect more than just income tax.

It can also impact:

Personal allowance tapering

High Income Child Benefit Charge

Student loan repayments

Pension contribution thresholds

A property accountant looks at the wider picture, not just the property pages.

Planning to Reduce the Impact of the Restriction

While the rules cannot be avoided, their impact can often be managed.

Planning options can include:

Adjusting ownership structures

Timing income and expenses

Using pension contributions

Reviewing refinancing decisions

Considering long term incorporation

These decisions should always be based on your full financial position.

How HMRC Reviews Finance Cost Claims

HMRC often focuses on finance costs during property enquiries.

They may ask for:

Proof of borrowing

Evidence of use of funds

Interest calculations

Clarification of refinancing

Clear documentation makes these reviews far easier.

When to Get Professional Advice

I usually recommend professional advice where:

You are a higher or additional rate taxpayer

You own multiple properties

You are considering refinancing

You are considering incorporation

Your tax position has changed significantly

Small misunderstandings in this area can create large tax bills over time.

My Professional View

In my professional opinion, property finance cost relief is one of the most important areas for landlords to understand properly.

The rules are not intuitive, and many people rely on outdated assumptions. Once you understand how the tax credit works and how it interacts with your wider income, planning becomes far more effective.

This is not about aggressive tax planning. It is about making sure you are using the system as it exists rather than paying more tax than the law requires.

Final Thoughts

So, how do you claim tax relief on property finance costs?

If you own property personally, relief is claimed as a basic rate tax credit through your Self Assessment tax return, not as an expense. If you own property through a company, interest is usually deductible in full. In all cases, accurate records and correct classification are essential.

The finance cost restriction has changed the economics of property investment for many landlords, but it has not removed relief altogether. In my experience, landlords who understand the rules and plan accordingly are far better placed than those who assume the system still works the way it used to.

When it comes to property finance costs, knowledge really does translate directly into lower tax.

You may also find our guidance on How do I calculate my rental income profit and How can I offset property losses against other income useful when exploring related property tax questions. For a broader overview of property tax reporting and planning topics you can visit our property hub which brings all related guidance together.