Is Mortgage Loan Interest Tax Deductible

Mortgage interest is one of the biggest recurring costs for property owners in the UK, so it is no surprise that many ask whether it can be deducted from their tax bill. The answer depends on how the property is used. If the mortgage relates to your main home, the interest is not deductible. If the loan is for a rental property or a business purpose, some form of tax relief may apply.

This article explains the UK tax rules on mortgage loan interest, including when it is tax deductible, how relief works for landlords and companies, and how to manage deductions for mixed-use loans.

Mortgage Interest on Your Main Home

If you own and live in your property, the mortgage interest is a personal cost. HMRC does not allow homeowners to claim tax relief on mortgage interest for their main residence. This applies whether you are repaying a standard residential mortgage or an equity release product.

The same rule applies to personal loans used to fund property purchases or renovations for your own use. Even if the loan increases your home's value or allows you to work from home, it is not considered a deductible expense. It remains part of your personal living costs.

In other countries, mortgage interest on a main home can reduce income tax, but this is not the case in the UK.

Mortgage Interest and Rental Properties

If you rent out a property, the tax treatment of mortgage interest is different. Until April 2020, individual landlords could deduct all mortgage interest from their rental income to calculate taxable profits. However, this changed under the Finance Act 2015.

Now, mortgage interest is no longer deducted as a direct expense. Instead, individual landlords receive a basic rate tax credit equal to 20 percent of their finance costs. This means:

• You report your full rental income

• You calculate tax on the entire profit, without deducting mortgage interest

• You then apply a tax credit of 20 percent of the interest cost

This system affects higher rate and additional rate taxpayers most, as they no longer receive relief at their marginal tax rate.

For example, if your rental income is £15,000 and your mortgage interest is £6,000, you are taxed on the full £15,000 profit but receive a tax credit of £1,200 (20 percent of £6,000).

This tax credit applies to:

• Mortgage interest

• Interest on loans used to buy furnishings

• Interest on loans used to fund improvements or maintenance on rental property

These rules apply to individuals and partnerships who own residential property. They do not apply to limited companies.

Company-Owned Property

If you purchase a rental property through a limited company, the company is subject to Corporation Tax, not Income Tax. In this case, mortgage interest and other finance costs remain fully deductible as business expenses.

This means:

• The company can deduct mortgage interest when calculating taxable profits

• The deduction applies before Corporation Tax is calculated

• There is no restriction or cap based on the shareholder's personal income

This is one reason many property investors choose to buy through a company structure, especially if they are higher rate taxpayers or plan to grow a property portfolio. However, this approach has its own costs and complexities, including legal fees, accounting requirements, and potential double taxation on dividends.

Mixed-Use Loans and Apportionment

Sometimes a loan is used partly for personal use and partly for a rental or business purpose. In such cases, only the portion of the loan used for the income-generating activity is eligible for relief.

You must apportion the interest cost based on how the borrowed funds were used. For example:

• You take out a £100,000 loan

• £70,000 is used to purchase a buy-to-let property

• £30,000 is used to renovate your own home

Only 70 percent of the interest on the loan can be claimed for tax purposes. The remaining 30 percent is not deductible, as it relates to personal expenditure.

You must keep accurate records and be able to demonstrate how the loan was allocated if HMRC ever raises a query.

Re-mortgaging and Further Borrowing

If you re-mortgage a rental property and release equity, the tax treatment depends on how the additional funds are used. If the extra borrowing is used to:

• Improve or maintain the rental property

• Buy another rental property

• Repay previous borrowings used for rental purposes

Then the interest on the new loan or additional borrowing may still qualify for the basic rate tax credit (if you are an individual landlord) or as a deduction (if you own property through a company).

If the extra funds are used for personal purposes, such as holidays, cars, or paying off personal debts, that portion of interest is not tax deductible.

Business Owners and Mortgage Interest

If you use part of your home for business, such as a home office, you may be able to claim a portion of your home-related costs, including mortgage interest, as a business expense. However, the rules are strict.

To claim mortgage interest as a business cost, the area of your home must be used exclusively for business purposes. If the same room is used for domestic purposes, no part of the mortgage interest can be claimed.

The amount you can claim must be apportioned based on:

• The size of the space used for business

• The time it is used for business purposes

• The total cost of the mortgage interest

For most sole traders and small business owners, the simpler and safer approach is to claim a flat rate for home working expenses, which does not include a deduction for mortgage interest.

Capital Gains Tax and Mortgage Interest

If you sell a property and make a gain, mortgage interest is not deductible when calculating Capital Gains Tax (CGT). You cannot reduce the gain by the interest paid on the loan, even if it was used to acquire or improve the property.

Allowable costs for CGT include:

• Purchase price

• Stamp duty

• Legal fees

• Estate agent fees

• Capital improvements (e.g. extensions or conversions)

But mortgage interest is not included, as it is classed as a financing cost rather than a capital expense.

Keeping Accurate Records

If you are claiming relief for mortgage interest, especially where loans have mixed uses or are connected to rental property, it is essential to keep clear and accurate documentation. This should include:

• Loan agreements and mortgage statements

• Evidence of how funds were used

• Any calculations of apportionment

• Interest breakdowns where multiple loans are involved

Without proper records, you risk claiming incorrect amounts or facing challenges from HMRC during an enquiry.

Conclusion

Mortgage loan interest is not tax deductible on your main residence or for personal use. However, it may be deductible in full or in part if the borrowing relates to rental property, investment activity, or business use.

Individual landlords now receive a basic rate tax credit instead of a full deduction, while limited companies can still deduct mortgage interest when calculating Corporation Tax. Business owners must be cautious when claiming interest on home-use loans and ensure the space is used exclusively for business purposes.

As always, if your situation involves mixed-use loans or complex property arrangements, seeking professional advice is the best way to stay compliant and make the most of available reliefs.