Mortgage Interest Relief for Landlords: What Has Changed and How It Affects Your Tax

Summary: Since the introduction of Section 24 of the Finance Act 2015, mortgage interest relief for individual landlords has undergone significant changes, affecting how tax is calculated on rental income. This article explains the current rules, their impact on landlords’ tax bills, and practical strategies to manage these changes effectively.

Understanding Mortgage Interest Relief for Landlords

Previously, landlords could deduct the full amount of their mortgage interest payments from rental income before calculating their taxable profit. This meant tax was only paid on the net profit after expenses, including mortgage interest.

However, from 2017 to 2020, the government phased out this full relief through Section 24 of the Finance Act 2015. Now, individual landlords receive only a basic-rate tax credit of 20% on their finance costs, rather than a full deduction. This change primarily affects individual landlords rather than companies and has a greater impact on those paying higher-rate tax.

What Changed Under Section 24?

The restrictions on mortgage interest relief were introduced gradually:

• 2017/18: 75% of mortgage interest deductible; 25% basic-rate credit.
• 2018/19: 50% deductible; 50% basic-rate credit.
• 2019/20: 25% deductible; 75% basic-rate credit.
• 2020/21 onwards: 0% deductible; 100% basic-rate credit only.

Currently, all individual landlords can claim only a 20% tax credit on their finance costs, regardless of their tax bracket. This applies to mortgage interest payments, loans for purchasing or improving rental properties, and other financing costs related to property.

By contrast, limited companies are unaffected by Section 24 and can still deduct full mortgage interest as a business expense before paying Corporation Tax.

Example: How Section 24 Affects Landlords

Before Section 24: A landlord with £30,000 rental income and £20,000 mortgage interest would pay tax on £10,000 profit.

After Section 24: The same landlord is taxed on the full £30,000 rental income but receives a 20% tax credit on the £20,000 mortgage interest. For those in higher tax brackets (40% or 45%), this results in a substantially higher tax bill despite unchanged actual profit.

This change can push landlords into higher tax bands and reduce overall rental profitability.

Who Is Most Affected?

The mortgage interest relief restrictions mainly impact:

• Individual landlords in higher or additional-rate tax brackets.
• Landlords with highly leveraged properties (large mortgages).
• Those with multiple properties or increasing rental income that moves them into higher tax bands.

Basic-rate taxpayers are less affected since the 20% credit aligns with their tax rate. However, some landlords have been pushed into higher tax bands due to the effective “tax on turnover” caused by Section 24.

Impact on Taxable Income and Net Profit

Under the new rules, mortgage interest no longer reduces taxable income. This means:

• Your gross rental income is added to other earnings (such as salary or pensions) before tax calculation.
• The combined income can push you into a higher tax bracket.
• Some landlords may lose entitlement to child benefit, personal allowance, or other means-tested benefits due to the increased income figure.

Although the 20% tax credit remains, the overall tax bill can increase significantly.

Mortgage Interest Relief for Limited Company Landlords

Landlords holding properties through a limited company are exempt from Section 24 restrictions. Companies can:

• Deduct 100% of mortgage interest as a business expense.
• Pay Corporation Tax (currently 19% to 25%) on actual profits.
• Distribute profits as dividends, subject to Dividend Tax.

Incorporation can be more tax-efficient for higher-rate taxpayers but involves setup costs, accountancy fees, and legal considerations. For many landlords, incorporation offers a practical way to mitigate the loss of full mortgage interest relief, especially for larger or expanding portfolios.

Tax-Saving Strategies for Landlords

Despite Section 24 restrictions, landlords can reduce their tax burden through several legal strategies:

• Consider Incorporation: Transferring property ownership to a limited company may restore full interest deductibility. Professional advice is essential as this can trigger Capital Gains Tax and Stamp Duty Land Tax.
• Joint Ownership: Sharing ownership with a spouse or civil partner allows utilisation of both personal allowances and lower tax bands.
• Refinance to Lower Interest Rates: Reducing mortgage costs can help offset restricted relief. Regular loan reviews are advisable.
• Claim All Allowable Expenses: Deduct all eligible costs such as repairs, insurance, letting agent fees, and management expenses.
• Use Pension Contributions: Making pension contributions can reduce taxable income and help avoid higher tax brackets.
• Plan for Capital Gains: When selling, consider Private Residence Relief, Lettings Relief, or Business Asset Disposal Relief where applicable.
• Offset Losses: Losses in one tax year can be carried forward to offset future rental profits.

Mortgage Interest Relief for Furnished Holiday Lets

Properties qualifying as Furnished Holiday Lets (FHLs) are exempt from Section 24 restrictions. FHL owners can:

• Deduct full mortgage interest.
• Claim capital allowances on furniture and equipment.
• Access certain business reliefs on sale, including a 10% Capital Gains Tax rate.

This makes the FHL option attractive for landlords with properties in tourist areas.

Digital Record-Keeping and Making Tax Digital (MTD)

From April 2026, landlords with rental income over £50,000 must comply with Making Tax Digital for Income Tax (MTD IT). This requires keeping all rental income and mortgage interest records digitally.

Using HMRC-compatible software such as Xero, QuickBooks, or FreeAgent ensures compliance, accurate tracking of mortgage costs and tax credits, and reduces errors during quarterly submissions.

Maintaining precise digital records is now essential for managing mortgage interest relief efficiently.

The Future of Mortgage Interest Relief for Landlords

The government has not indicated any plans to reverse Section 24 changes. While discussions about fairness continue, especially for small landlords, future Budgets may adjust thresholds or reintroduce partial reliefs for certain groups. Landlords should plan on the basis that current rules will remain.

Long-term, the best approach involves portfolio restructuring and proactive tax planning.

Frequently Asked Questions

Can landlords still claim mortgage interest as an expense?
No, individual landlords receive a 20% basic-rate tax credit on mortgage interest payments instead of a full expense deduction.

Does this affect limited company landlords?
No, companies can still deduct full mortgage interest before calculating Corporation Tax.

Is the 20% credit applied automatically?
Yes, it is automatically calculated when filing your Self Assessment tax return.

Can I switch my property to a company to avoid Section 24?
Yes, but this may trigger Capital Gains Tax and Stamp Duty Land Tax. Professional advice is recommended.

Do these rules apply to furnished holiday lets?
No, FHLs retain full mortgage interest deductibility and other tax benefits.

Conclusion

The removal of full mortgage interest relief under Section

Source: landlordadvice.co.uk