Is Home Loan Interest Tax Deductible

Buying a property is a significant financial commitment, and many people rely on mortgages or loans to make it possible. Understandably, one of the most common questions is whether home loan interest is tax deductible in the UK.

For most homeowners, the answer is no. Mortgage interest on your main home is not tax deductible for Income Tax purposes. However, if the property is used for rental or business purposes, or if the loan was taken out specifically for investment or trading activity, the interest may qualify for tax relief.

This article explains when home loan interest is and is not tax deductible, how the rules vary for landlords and business owners, and what records you should keep to ensure any eligible claims are handled correctly.

Homeowners: No Tax Relief on Residential Mortgage Interest

If you have a mortgage on the home you live in, the interest you pay is not tax deductible. HMRC does not allow individuals to deduct the cost of borrowing for personal or domestic purposes, even if the property increases in value over time.

This applies whether the loan is a standard residential mortgage, a personal loan used to purchase your home, or additional borrowing for renovations. The interest remains a personal expense and does not affect your tax position.

Some countries offer tax deductions for mortgage interest on your primary residence, but the UK does not.

Landlords: Mortgage Interest Relief for Rental Properties

If you let out a property and receive rental income, you are taxed on the profit you make. That means you can deduct allowable expenses when calculating your taxable income, but the rules around mortgage interest have changed significantly in recent years.

Until April 2017, landlords could deduct the full amount of mortgage interest from their rental income. This changed under new legislation which was phased in between 2017 and 2020.

Now, landlords can no longer deduct mortgage interest as a direct expense. Instead, they receive a basic rate tax credit equal to 20 percent of their finance costs. This is known as Section 24 mortgage interest restriction.

Here’s how it works:

• You declare your full rental income

• You cannot deduct the mortgage interest from that income

• Instead, you calculate your Income Tax on the full profit

• Then you apply a tax credit equal to 20 percent of the interest cost

This system affects higher and additional rate taxpayers more significantly, as they no longer receive tax relief at their marginal rate. Basic rate taxpayers are generally unaffected.

The restriction applies to most residential landlords, including individuals and partnerships. It does not apply to limited companies.

Example for an Individual Landlord

Let’s say you earn £12,000 a year from renting out a flat, and you pay £5,000 in mortgage interest.

Under the old system, you would deduct £5,000 from £12,000 and be taxed on £7,000.

Under the current system:

• You are taxed on the full £12,000

• You receive a basic rate tax credit of £1,000 (20% of £5,000)

• Your actual tax bill depends on your total income and tax band

This can increase the amount of Income Tax payable, particularly if the rental income pushes you into a higher tax band.

Limited Companies and Mortgage Interest

If you own property through a limited company, the rules are different. Companies can still deduct mortgage interest and finance costs in full as allowable expenses when calculating Corporation Tax.

This is one of the reasons many property investors are choosing to buy through limited companies rather than in their personal names.

However, setting up and managing a company comes with its own tax and administrative responsibilities, so it’s important to weigh the long-term benefits carefully.

Mixed-Use Loans and Apportionment

Sometimes a loan may be used partly for business or rental purposes and partly for personal use. In these cases, you must apportion the interest accordingly and claim only the business or rental portion.

For example, if you take out a £100,000 loan and use £60,000 to purchase a buy-to-let property and £40,000 to improve your own home, you can only claim relief on 60 percent of the interest.

You must keep detailed records to support this calculation and be able to show how the funds were used.

Home Loans for Business Use

If you run a business from home and have taken out a loan to fund a home office conversion, HMRC may allow a portion of the interest to be deducted against your trading profits, but only in limited circumstances.

To qualify:

• The loan must be specifically for business use

• The area of the home must be used exclusively for business

• You must apportion the cost accurately and consistently

This is more likely to apply to sole traders or partnerships. However, the rules are strict, and using a room partly for domestic purposes (such as a spare bedroom that doubles as an office) may prevent the interest from being deductible.

If you are claiming any part of your home loan interest as a business expense, it is best to seek professional advice to ensure your claim is accurate and compliant.

Equity Release Loans

Homeowners who take out equity release or second charge loans should also consider the tax implications. If the funds are used for personal purposes, the interest is not deductible.

If part or all of the funds are used for investment, rental, or business activities, a portion of the interest may be claimable depending on how the funds are used.

Documentation is key. HMRC will expect a clear paper trail linking the borrowed funds to the qualifying use.

Inheritance Tax and Interest Deductions

In some cases, interest on loans used to acquire property or investments may be deductible when calculating the value of an estate for Inheritance Tax purposes. These rules are niche and apply mainly to complex estates with significant debt arrangements, so professional legal and tax advice is essential.

Keeping Accurate Records

Whether you are a landlord, business owner, or company director, it is important to keep:

• Loan agreements and statements

• Evidence of how funds were used

• Details of any repayments or refinancing

• Apportionment calculations where applicable

These documents will support your claims if HMRC ever asks for evidence and will help ensure that you do not overstate or underclaim allowable deductions.

Conclusion

Home loan interest is not tax deductible in the UK for individuals using the property as their main residence. However, landlords, property investors, and businesses may be able to claim relief in specific circumstances.

For residential landlords, the current system replaces traditional deductions with a basic rate tax credit. Limited companies can still deduct mortgage interest in full against rental income. In all other cases, the key factor is how the loan is used and whether it relates to an income-generating activity.

Understanding the rules helps you make better financial decisions and avoid errors when completing your tax return. If your situation involves mixed-use borrowing or complex ownership structures, speaking to a qualified tax adviser is the best way to stay compliant and make the most of any available reliefs.