Is Mortgage 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 Mortgage Loan Interest Tax Deductible to help you learn how mortgage interest is handled, what relief exists, and who it applies to.

I get asked this question constantly and usually with a sense of frustration behind it. Someone is paying a large mortgage every month and wants to know whether at least part of that cost can be offset against tax. From experience the confusion comes from the fact that the answer depends entirely on why the mortgage exists and how the property or loan is being used.

Mortgage interest is treated very differently depending on whether the property is your home a rental property or a business asset. Over the years the rules have also changed significantly especially for landlords which has added to the confusion.

In this article I want to explain clearly when mortgage loan interest is tax deductible in the UK and when it is not. I will walk through the rules for homeowners landlords limited companies and business owners using property for work. I will also explain how the rules have changed why HMRC treats mortgage interest the way it does and what practical planning options still exist.

This is written from real UK accountancy experience and grounded in current HMRC practice.

What Mortgage Interest Actually Is

Before getting into tax rules it helps to be clear about what mortgage interest means.

Your mortgage payment usually has two parts:

The capital repayment which reduces the loan
The interest which is the cost of borrowing

Only the interest element is ever potentially tax deductible. Capital repayments are never deductible for tax purposes.

From experience many people assume their full mortgage payment is relevant for tax. It is not. Only the interest portion is ever considered.

Mortgage Interest on Your Own Home

I will start with the simplest and most common scenario.

If the mortgage is on your own home where you live mortgage interest is not tax deductible.

This applies regardless of whether:

You are employed
You are self employed
You run a limited company
You work from home

There is no tax relief for mortgage interest on your main residence.

This used to be different many years ago but that relief was abolished decades ago.

From HMRC’s perspective your home is a personal asset and the mortgage is a personal cost.

Working From Home Does Not Change This

This is an important point because it is often misunderstood.

Even if you run a business from home you cannot deduct mortgage interest on your home simply because you work there.

You may be able to claim a small proportion of household running costs but mortgage interest is treated differently and is generally excluded.

Trying to claim mortgage interest incorrectly can create capital gains tax issues later which I will explain shortly.

Mortgage Interest for Landlords

This is where most confusion exists because the rules have changed.

Historically landlords could deduct mortgage interest in full when calculating rental profits. That is no longer the case for most residential landlords.

The Current Rule for Residential Landlords

If you rent out residential property as an individual mortgage interest is no longer deducted from rental income.

Instead landlords receive a basic rate tax credit equal to 20 percent of the mortgage interest.

This applies regardless of your personal tax rate.

So if you are a higher rate or additional rate taxpayer you do not get full relief.

From experience this change has significantly increased tax bills for many landlords even where cash flow has not improved.

How the Mortgage Interest Tax Credit Works

Rather than reducing taxable profit the interest credit reduces your tax bill.

For example:

Rental profit before interest is calculated
Tax is calculated on that profit
A tax credit equal to 20 percent of mortgage interest is then applied

This means:

Mortgage interest does not reduce taxable income
Relief is capped at basic rate
Higher rate relief is no longer available

This is a key distinction that catches many landlords out.

Mortgage Interest for Limited Company Property Owners

If a property is owned by a limited company the rules are different.

Limited companies can usually deduct mortgage interest in full as a business expense when calculating corporation tax.

This applies to:

Residential property companies
Commercial property companies
Mixed use property companies

From experience this is one of the reasons some landlords consider incorporation but this decision involves many other factors including stamp duty capital gains tax and ongoing compliance.

Mortgage Interest for Commercial Property

If you own commercial property personally and rent it out mortgage interest is usually deductible in full against rental income.

The restriction described earlier applies primarily to residential property.

Commercial property includes:

Offices
Shops
Warehouses
Industrial units

From experience HMRC treats commercial property more like a business investment than a personal asset.

Mortgage Interest for Sole Traders

If you are a sole trader and have a mortgage related to your trade the treatment depends on what the mortgage relates to.

If the mortgage is on business premises mortgage interest is usually deductible.

If the mortgage is on your home it is generally not deductible even if you work from there.

This distinction matters.

Using Part of Your Home for Business

Some sole traders and directors use part of their home exclusively for business.

In theory a proportion of mortgage interest may be allowable if:

Part of the home is used exclusively for business
The calculation is reasonable and documented

However from experience this is an area of risk.

Exclusive business use can trigger capital gains tax issues when the property is sold because part of the home may lose private residence relief.

For this reason many accountants advise against claiming mortgage interest on a home office and instead use safer flat rate or running cost methods.

Mortgage Interest on Buy to Let Properties

For individual landlords this falls under the residential landlord rules described earlier.

Mortgage interest is not deducted from rental income. Instead the basic rate tax credit applies.

This includes buy to let mortgages and remortgages where funds were used for the rental business.

Remortgaging and Interest Deductibility

Interest on remortgaged loans can still qualify for relief provided the borrowing relates to the rental business and does not exceed the original purchase value plus allowable costs.

Using remortgage funds for personal spending can restrict relief.

From experience clear records of how remortgage funds were used are essential.

Mortgage Interest for Furnished Holiday Lets

Furnished holiday lets have historically been treated differently.

Under older rules mortgage interest was deductible in full.

However the furnished holiday let regime is being phased out which means treatment is changing.

Current and future treatment depends on timing and transitional rules so advice is essential.

Mortgage Interest and Capital Gains Tax

This is an area where mistakes can be costly.

Claiming mortgage interest on part of your home can affect private residence relief.

If HMRC considers part of the property to have been used exclusively for business that portion may be subject to capital gains tax when the property is sold.

From experience the tax saved on mortgage interest is rarely worth the future CGT risk.

Mortgage Interest and Limited Company Directors

Sometimes directors personally own property and rent it to their company.

In this scenario mortgage interest may be deductible against the rental income received from the company.

However the rent must be commercial and properly documented.

This structure needs careful handling to avoid benefit in kind or transfer pricing issues.

What Mortgage Interest Is Never Deductible

To be clear mortgage interest is not deductible where:

The mortgage is on your personal home
The loan funds personal spending
The interest relates to capital repayments
The expense is not incurred for income generating purposes

From experience HMRC challenges claims that stretch these principles.

Common Mistakes I See

From experience these issues come up repeatedly.

Assuming mortgage interest is always deductible
Claiming interest on your home office incorrectly
Not understanding the landlord tax credit
Confusing company and personal ownership
Failing to keep loan documentation

Most of these mistakes lead to HMRC queries or unexpected tax bills.

How Mortgage Interest Should Be Recorded

Correct treatment in the accounts and tax return matters.

For landlords interest must be separated clearly from capital repayments.

For companies interest should be recorded as a finance cost.

For individuals the tax credit must be calculated correctly.

From experience poor bookkeeping creates unnecessary problems here.

How Accountants Help With Mortgage Interest

This is not just a compliance issue.

Accountants help by:

Explaining what relief applies
Ensuring correct treatment in returns
Avoiding CGT traps
Advising on structure and planning
Reviewing remortgage implications

From experience professional advice often prevents costly long term mistakes.

Mortgage Interest for Bedford Property Owners in Practice

Working with Bedford landlords and business owners I see a wide range of situations.

Single property landlords affected by interest restrictions
Property companies claiming full relief
Home based business owners unsure what they can claim
Commercial landlords with clearer rules

The biggest issue is usually misunderstanding rather than deliberate error.

Planning Options That Still Exist

While the rules are tighter there are still planning considerations.

Ownership structure
Pension contributions
Timing of expenses
Company vs personal ownership

From experience these decisions need to be looked at holistically rather than focusing on mortgage interest alone.

The key takeaway

I have to say this clearly.

Mortgage interest is sometimes tax deductible and sometimes not. The difference lies in ownership use and structure not in whether the cost feels business related.

For homeowners there is no relief. For landlords relief is restricted. For companies relief is usually available. For home offices caution is essential.

In my opinion the biggest mistake people make is assuming mortgage interest works like other expenses.

If there is one takeaway from this article it is this.

Never assume mortgage interest is deductible without understanding the context.

When you get that context right you avoid HMRC problems and make decisions based on the real after tax position rather than outdated assumptions.

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