How Do Mortgage Interest Rules Affect Landlords
Mortgage interest used to be one of the biggest tax deductions available to landlords in the UK. However, changes introduced by HMRC over recent years have transformed how finance costs are treated. For many landlords, especially those on higher tax rates, these changes have reduced profits and increased tax bills. This article explains how the current mortgage interest rules work, who they affect, and what landlords can do to manage their finances more efficiently.
What changed with mortgage interest tax relief
Before April 2020, individual landlords could deduct all mortgage interest and other finance costs from their rental income before calculating their tax bill. This meant that landlords paid tax only on their true profit after loan interest was taken into account.
The government gradually phased out this system between 2017 and 2020. Today, landlords no longer deduct mortgage interest as an expense. Instead, they receive a basic rate tax credit equal to 20% of their mortgage interest payments.
While this may sound simple, the change has had a major impact on landlords who pay higher rates of tax.
Example: old vs new system
A landlord earns £20,000 in rent and pays £8,000 in mortgage interest.
Old system (before 2020): The landlord paid tax on £12,000 profit (£20,000 minus £8,000).
New system: The landlord pays tax on the full £20,000, but then receives a 20% tax credit on the £8,000 interest (£1,600).
If the landlord is a basic rate taxpayer, the outcome is roughly the same. However, for higher and additional rate taxpayers, the difference can be significant, leading to a higher overall tax bill.
Who is affected by the new rules
The rules apply to individual landlords who own residential property in their own name. They do not apply to companies or to landlords renting out furnished holiday lets or commercial property.
This means:
Landlords who own buy-to-let properties personally are affected.
Landlords who operate through a limited company are not affected.
Those letting holiday homes or commercial buildings continue to deduct full mortgage interest as before.
For landlords with large loans or multiple properties, the impact of the restrictions can be substantial.
How the new rules affect taxable income
One of the biggest consequences of the new system is that it increases the amount of income shown on a landlord’s tax return.
Under the old system, mortgage interest reduced taxable income. Now, since interest is no longer deductible, the landlord’s taxable income appears higher even though actual profit may be the same or lower.
This can have several side effects:
Pushing landlords into a higher tax bracket
Reducing personal allowances or child benefit eligibility
Increasing exposure to student loan repayments or pension contribution limits
These indirect effects mean that even landlords who do not pay much more in tax overall can still see other financial implications.
The basic rate tax credit explained
Under the current system, all landlords receive a flat-rate tax credit worth 20% of their mortgage interest payments. This is designed to give basic rate taxpayers the same level of relief they had before the changes.
However, higher and additional rate taxpayers lose out because they used to receive 40% or 45% relief but now only get 20%.
Example
A higher rate taxpayer pays £10,000 in mortgage interest.
Under the old rules, they could deduct £10,000 from their rental income and save £4,000 in tax (40% of £10,000).
Under the new rules, they receive a tax credit of £2,000 (20% of £10,000).
This means their effective tax bill has increased by £2,000.
Limited companies and mortgage interest
The restriction does not apply to properties owned through a limited company.
Companies can still deduct all mortgage interest as a business expense when calculating their taxable profits. This means that landlords operating through a company continue to receive full tax relief on finance costs.
For this reason, many landlords have chosen to incorporate their property portfolios. However, doing so is not suitable for everyone. There are costs and tax implications involved in transferring existing properties into a company, including:
Capital Gains Tax (CGT) on the property’s increase in value
Stamp Duty Land Tax (SDLT) on the transfer to the company
Higher mortgage rates and stricter lending criteria
A qualified property accountant can help you calculate whether incorporation would reduce your overall tax burden.
Strategies to manage the impact
Although the mortgage interest rules are fixed, landlords can take steps to manage their tax position more effectively.
1. Review ownership structure
If you are a higher rate taxpayer with multiple properties, moving future purchases into a limited company may restore full interest deductibility. For smaller landlords or those on basic rate tax, staying as an individual may still be simpler and more cost-effective.
2. Use joint ownership wisely
Married couples or civil partners can transfer property shares between them to make use of both tax bands. For example, transferring a greater share of ownership to a lower-earning partner can reduce the overall tax paid on rental income.
3. Keep accurate records
It is vital to keep detailed records of mortgage interest, arrangement fees, and other finance costs. Even under the new system, these figures are needed to calculate the 20% tax credit accurately.
4. Offset other expenses
Landlords can still deduct a wide range of other legitimate expenses from rental income, including letting agent fees, insurance, repairs, and professional costs. Maximising these deductions helps offset the loss of full mortgage interest relief.
5. Consider professional advice
A property accountant can model different ownership and financing scenarios to find the most tax-efficient setup. They can also ensure you claim every possible relief while staying compliant with HMRC rules.
How to claim mortgage interest relief
If you file a Self Assessment tax return, HMRC’s system automatically applies the 20% tax credit based on the finance costs you report. You simply need to enter your mortgage interest and related costs in the property income section of your return.
If you use an accountant or tax software, they will handle the calculation for you.
Why the government made the change
The restriction on mortgage interest relief was introduced to make the tax system “fairer” between landlords and homebuyers. The government argued that landlords had an advantage because they could deduct interest as a business expense while homeowners could not.
The reform also aimed to limit the rapid expansion of the buy-to-let sector, which some believed was driving up property prices and reducing housing availability.
While the change achieved its policy goals, it has made property investment less profitable for many individuals, particularly those with highly leveraged portfolios.
Final thoughts
The mortgage interest tax rules have had a major impact on landlords, especially higher-rate taxpayers who now face reduced relief on finance costs. While the basic rate credit provides some compensation, it does not fully replace the old system for those with larger mortgages or higher incomes.
Owning property through a limited company remains one of the few ways to continue claiming full mortgage interest deductions, but it is not always the best solution for everyone.
The key is to review your position carefully, maintain accurate records, and seek professional advice before making major decisions. With the right structure and planning, it is still possible to manage your property investments efficiently and keep your tax bills under control.