Is Home Loan Interest Tax Deductible

Introduction

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about Is Home Loan Interest Tax Deductible to help you see when interest can be claimed, what restrictions apply, and how rules differ by situation.

This is a question I am asked regularly and the answer often surprises people. From experience many homeowners assume that because a mortgage is such a large financial commitment the interest must be tax deductible in some form. Others have heard that it used to be deductible and are unsure what the current position is.

The reality under UK tax rules is more nuanced. Whether home loan interest is tax deductible depends entirely on how the property is used and who is borrowing the money. In this article I explain clearly when home loan interest is deductible when it is not and how the rules apply in practice for homeowners landlords and business owners. I will also explain how the rules have changed over time and what this means for forward planning.

What Do We Mean by Home Loan Interest?

Home loan interest refers to the interest portion of repayments on a mortgage or loan secured against property. This could include:

• A residential mortgage on your main home

• A buy to let mortgage

• A remortgage or further advance

• A loan secured on a property used partly for business

The key point is that HMRC does not look at the label on the loan. It looks at how the borrowed money is used.

From experience this distinction is where most confusion arises.

Is Mortgage Interest on Your Main Home Tax Deductible?

For most people the answer is no.

If the mortgage relates to your main private residence and the property is used purely as your home the interest is not tax deductible. This has been the case for many years.

Even if you work from home or run a business the personal element of the mortgage interest is not deductible simply because you live there.

From HMRC’s point of view the cost of financing your home is a personal expense not a business one.

This applies regardless of whether you are employed self employed or a company director.

What If I Work From Home?

Working from home does not automatically make mortgage interest deductible.

If you are self employed and work from home you may be able to claim a proportion of certain household costs but mortgage interest is treated cautiously.

In most cases HMRC allows a proportion of household running costs such as electricity heating and internet. Mortgage interest is only allowable in very limited circumstances and claiming it can create complications including potential Capital Gains Tax issues later.

From experience I generally advise caution here. Claiming mortgage interest for home working is rarely worth the long term risk unless the property has a clearly defined and exclusive business area.

Is Home Loan Interest Deductible for Landlords?

This is where the rules change and where many people still rely on outdated information.

Historically landlords could deduct mortgage interest in full from rental income. That is no longer the case for individuals.

Under current UK rules individual landlords cannot deduct mortgage interest as an expense. Instead they receive a basic rate tax credit equal to 20 percent of the interest paid.

This means:

• Mortgage interest does not reduce taxable rental profit

• A tax credit is applied after tax is calculated

• The relief is capped at the basic rate

From experience this change has significantly increased tax bills for higher rate landlords and often comes as a shock.

How the Mortgage Interest Tax Credit Works

The tax credit works as follows.

You calculate your rental profit without deducting mortgage interest. Income tax is calculated on that figure. After that HMRC applies a tax reduction equal to 20 percent of the mortgage interest paid.

If you are a basic rate taxpayer the outcome may be similar to the old system. If you are a higher or additional rate taxpayer the relief is less generous.

From experience this rule has pushed many landlords into higher tax bands even though their cash position has not changed.

Buy to Let Through a Limited Company

The rules are different for limited companies.

If a limited company owns rental property the company can usually deduct mortgage interest as a business expense when calculating corporation tax.

This is one of the reasons some landlords consider incorporating their property business. However this decision has wider tax and legal implications including Stamp Duty Land Tax and Capital Gains Tax.

From experience incorporation should never be done purely for mortgage interest relief without full advice.

Home Loan Interest for the Self Employed

If you are self employed and take out a loan secured on your home the deductibility depends on what the loan is used for not what it is secured against.

This is a crucial point.

If you borrow money and use it wholly and exclusively for business purposes then the interest may be deductible even if the loan is secured on your home.

For example a self employed person who takes out a secured loan to fund business equipment may be able to claim the interest proportion related to business use.

However clear records are essential. HMRC will expect to see evidence of how the funds were used.

From experience this area requires careful documentation and is best handled with professional input.

Remortgaging and Interest Deductibility

Remortgaging does not change the tax treatment on its own.

HMRC looks at the purpose of the borrowing not the property itself.

If you remortgage your home and release equity for personal use the interest is not deductible. If the funds are used for business purposes the interest may be deductible in proportion to business use.

For landlords HMRC allows interest relief on borrowing up to the value of the property when it was first let provided the funds relate to the rental business.

This is an area where many people get caught out so careful planning matters.

Home Loan Interest and Limited Companies

If a director borrows personally to fund a company the interest is generally not deductible personally. The structure matters.

If the company borrows and pays the interest the company can usually deduct it as a business expense.

If the director borrows personally and lends the money to the company the tax treatment becomes more complex and may involve loan relationships or interest income.

From experience getting the structure right at the outset avoids ongoing issues.

Capital Gains Tax Considerations

One important forward looking consideration is Capital Gains Tax.

If you claim mortgage interest or other costs against a part of your home used exclusively for business you may restrict your entitlement to Private Residence Relief when the property is sold.

This can result in a Capital Gains Tax liability that would not otherwise exist.

From experience this is often overlooked and can outweigh any short term income tax benefit.

Common Misunderstandings I See

There are a few recurring myths I see regularly.

One is that having a home office automatically makes mortgage interest deductible. It does not.

Another is that all landlords can deduct mortgage interest in full. They cannot if they are individuals.

I also see confusion where people assume the type of loan determines deductibility rather than the use of funds.

These misunderstandings often lead to incorrect tax returns and unexpected bills.

A Real World Example From Experience

Consider a self employed consultant who remortgaged their home and used part of the funds to invest in their business.

With clear records we were able to identify the business portion of the loan and claim a proportion of the interest as a deductible expense.

Without that clarity the interest would not have been allowable and HMRC could have challenged the claim.

This illustrates how important structure and documentation are.

Should You Try to Claim Home Loan Interest?

Whether you should attempt to claim home loan interest depends on your circumstances and your appetite for complexity.

For most homeowners the answer is no because it is not allowable.

For landlords it is important to understand the tax credit system and plan accordingly.

For business owners it may be possible but only with careful structuring and record keeping.

From experience trying to force a claim where it does not clearly apply often creates more problems than it solves.

Planning Ahead

Home loan interest is an area where forward planning matters.

Understanding the tax impact before borrowing or remortgaging allows you to make informed decisions about structure cash flow and long term tax exposure.

Once borrowing is in place options are more limited.

From experience early advice saves both tax and stress.

The key takeaway

So is home loan interest tax deductible? Sometimes but often no.

For private homeowners it is not deductible. For individual landlords it is relieved only through a basic rate tax credit. For companies and certain business borrowings it may be deductible if structured correctly.

The key principle HMRC applies is purpose not property.

If you understand that rule and plan accordingly you can avoid common mistakes and make better financial decisions.

If you are unsure how your own borrowing should be treated it is worth getting advice before making assumptions. In tax clarity upfront is always cheaper than correction later.

For more guidance on related topics, explore our Bedford Accounting Hub, which brings together practical advice for Bedford clients.