How Do I Claim Tax Relief on Property Finance Costs

What counts as a finance cost

Finance costs are the expenses related to borrowing money to buy or improve a rental property. They include:

• Mortgage interest on buy-to-let loans

• Loan arrangement or broker fees

• Overdraft or credit card interest used for property purposes

• Fees for alternative finance arrangements such as Islamic finance

Only the interest portion of the payment qualifies for relief. You cannot claim relief on the capital repayment of the loan, as this reduces the principal balance rather than being an expense.

The rules for individual landlords

For landlords who own property in their personal name, the rules for claiming mortgage interest relief changed significantly between 2017 and 2020.

Before 2020, landlords could deduct all finance costs from rental income before calculating tax. This meant that tax was only paid on the true profit.

Now, under the new rules, landlords can no longer deduct mortgage interest as an expense. Instead, they receive a basic rate tax credit equal to 20% of their finance costs.

Example

You earn £20,000 in rental income and pay £8,000 in mortgage interest.

• Old system (before 2020): You would pay tax on £12,000 profit.

• New system: You pay tax on the full £20,000 but receive a tax credit of £1,600 (20% of £8,000).

If you are a basic rate taxpayer, this change makes little difference. However, if you are a higher or additional rate taxpayer, your overall tax bill will be higher because you only receive 20% relief regardless of your tax bracket.

How to claim the 20% tax credit

You claim the tax credit through your Self Assessment tax return. HMRC’s online system will automatically calculate the credit based on the finance costs you enter.

You should include:

• Mortgage interest paid during the tax year

• Loan or mortgage arrangement fees

• Interest on any additional loans used to fund property repairs or improvements

Keep records such as mortgage statements and invoices to support your claim in case HMRC requests evidence.

If you use a letting agent or accountant, provide them with full details of your finance costs so they can include the correct figures in your return.

How limited companies claim finance cost relief

If you own property through a limited company, the restrictions on mortgage interest do not apply.

Companies can still deduct all mortgage interest and other finance costs as allowable business expenses before calculating profit.

This means:

• Corporation Tax is only paid on the net profit after interest and expenses.

• There is no need for a separate tax credit calculation.

Example

A property company earns £40,000 in rent and pays £15,000 in mortgage interest.

The company’s taxable profit is £25,000. At the current Corporation Tax rate of 25%, the tax bill would be £6,250.

By contrast, a higher-rate individual landlord earning the same income would pay significantly more once limited to the 20% credit.

This is one reason why many landlords have incorporated their portfolios in recent years.

What if you have multiple properties

If you own several properties, the finance costs from all of them are combined to calculate the total relief. You do not need to separate them by property.

However, you should keep individual records for each property in case HMRC asks for a breakdown.

If some properties are mortgaged and others are not, you can still claim the full 20% credit on all eligible interest costs.

Refinancing and remortgaging

If you remortgage a property to release equity for repairs, improvements, or to buy another property, the interest on the new loan is usually still allowable for relief.

However, if you use the additional borrowing for personal reasons, such as buying a car or funding a holiday, the interest on that portion cannot be claimed.

Always document how the remortgaged funds are used to demonstrate that the borrowing is for property investment purposes.

What about short-term or bridging loans

Interest on short-term loans or bridging finance used to buy, renovate, or sell property can also qualify for relief, provided it was incurred wholly for the rental business.

These costs can be deducted in the same way as mortgage interest or claimed as part of the 20% credit, depending on whether you own property personally or through a company.

How to make the most of your finance cost relief

Even with restrictions in place, there are still ways to manage your borrowing efficiently:

• Consider company ownership: For larger portfolios or higher-rate taxpayers, incorporating a property business can restore full interest deductibility.

• Use joint ownership: Splitting ownership between spouses can help use both partners’ tax bands and allowances.

• Review your mortgage structure: Fixed rates, interest-only loans, or refinancing may provide better returns and lower costs.

• Track all loan-related fees: Arrangement and exit fees count toward your finance cost total.

A property accountant can model the tax impact of each option and ensure you claim every allowable deduction.

Record keeping and documentation

To support your claim, keep the following documents:

• Mortgage and loan statements showing interest paid

• Correspondence from lenders detailing fees or charges

• Proof of how borrowed funds were used (if applicable)

• Receipts for professional advice or arrangement costs

Records should be retained for at least five years after the Self Assessment filing deadline, or six years if you operate through a company.

When to seek professional advice

The finance cost restriction is one of the most significant tax changes to affect landlords in recent years. The rules can be complex, especially if you own multiple properties or are considering moving to a company structure.

A qualified property accountant can:

• Calculate the tax impact of your finance costs

• Help you decide whether incorporation is beneficial

• Ensure compliance with HMRC’s record-keeping requirements

• Advise on refinancing strategies to maximise deductions

Final thoughts

You can still claim tax relief on property finance costs, but how you do so depends on your ownership structure. Individual landlords now receive a 20% tax credit instead of a full deduction, while limited companies can continue to deduct all mortgage interest as an expense.

For higher-rate taxpayers, this change has made careful planning more important than ever. Keeping detailed records and working with a property accountant can help you make the most of the reliefs available, manage your cash flow, and reduce your overall tax burden legally and efficiently.