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, the way landlords claim mortgage interest relief has changed significantly, affecting how rental income is taxed. This article explains the changes, who is most affected, and strategies landlords can use to manage their tax liabilities effectively.

Understanding Mortgage Interest Relief for Landlords

Mortgage interest relief has long been a key consideration for landlords in England when calculating taxable rental income. Previously, landlords could deduct the full amount of their mortgage interest payments from rental income before tax was applied, reducing their taxable profit.

However, the introduction of Section 24 of the Finance Act 2015 phased out this full deduction between 2017 and 2020. Now, individual landlords receive only a basic-rate tax credit of 20% on finance costs, rather than a full mortgage interest deduction. This change has increased the effective tax rates for many landlords, especially those in higher tax brackets.

What Changed Under Section 24?

The restrictions introduced by Section 24 were implemented gradually over four tax years:

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

From 2020/21, all individual landlords can claim only a 20% tax credit on mortgage interest and other finance costs, regardless of their actual tax rate. This applies to:

• Mortgage interest payments
• Loans used to purchase, improve, or furnish rental properties
• Overdrafts or other financing related to property

It is important to note that these restrictions do not apply to limited companies, which can still deduct full mortgage interest as a business expense before calculating Corporation Tax.

Example of Section 24’s Impact on Landlords

Before Section 24: A landlord with £30,000 in rental income and £20,000 in mortgage interest would pay tax only on the £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 landlords in the higher (40%) or additional (45%) tax brackets, this results in a substantially higher tax bill, despite unchanged actual profits.

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

Who Is Most Affected?

The mortgage interest relief restrictions primarily affect:

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

Basic-rate taxpayers are less affected since the 20% tax credit roughly matches their tax rate. However, some landlords who were previously basic-rate taxpayers have been pushed into higher tax bands due to the “tax on turnover” effect of Section 24.

Impact on Taxable Income and Net Profit

The key effect of the new rules is that mortgage interest no longer reduces taxable income. This means:

• Gross rental income is added to other income sources (such as salary or pensions) before tax calculation
• The combined income may push landlords into higher tax brackets
• Some landlords may lose entitlement to child benefit, personal allowance, or other means-tested benefits due to increased taxable income

Although landlords receive a 20% tax credit, their overall tax liability can increase significantly.

Mortgage Interest Relief for Limited Company Landlords

Landlords who own property 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 between 19% and 25%) only on actual profits
• Distribute profits later as dividends, subject to Dividend Tax

Incorporation can be a tax-efficient option for higher-rate taxpayers, though it involves setup costs, accountancy fees, and legal considerations. Many landlords with larger or expanding portfolios consider incorporation to mitigate the impact of Section 24.

Tax-Saving Strategies for Landlords

Despite the restrictions, landlords can adopt several strategies to reduce their tax burden legally:

Consider Incorporation

Transferring property ownership into a limited company may restore full mortgage interest deductibility. However, this can trigger Capital Gains Tax and Stamp Duty Land Tax charges, so professional advice is essential.

Joint Ownership

Splitting ownership with a spouse or civil partner allows both parties to utilise personal allowances and lower tax bands.

Refinance to Lower Interest Rates

Reducing mortgage costs can help offset the impact of restricted relief. Many landlords review their loans annually to secure competitive rates.

Claim All Allowable Expenses

Ensure all eligible expenses are claimed, including repairs, insurance, letting agent fees, and management costs.

Use Pension Contributions

Making pension contributions can reduce taxable income and help avoid moving into higher tax brackets.

Plan for Capital Gains

When selling, consider Private Residence Relief, Lettings Relief, or Business Asset Disposal Relief where applicable.

Offset Losses

Rental losses can be carried forward to offset future profits, reducing tax liabilities.

Mortgage Interest Relief for Furnished Holiday Lets (FHLs)

Properties qualifying as Furnished Holiday Lets 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 accounting software such as Xero, QuickBooks, or FreeAgent helps ensure compliance, accurate tracking of mortgage costs, and fewer errors during quarterly submissions.

The Future of Mortgage Interest Relief

The government has not indicated any plans to reverse Section 24. While discussions continue about the fairness of these rules, especially for small landlords, it is prudent to assume the current system will remain. Long-term strategies such as portfolio restructuring and proactive tax planning are essential for managing tax exposure.

Frequently Asked Questions

Can landlords still claim mortgage interest as an expense?

No. Under Section 24, landlords receive a 20% basic-rate tax credit on mortgage interest payments instead of a direct expense deduction.

Does this affect limited company landlords?

No. Limited companies can still deduct full mortgage interest before calculating Corporation Tax.

Is the 20% tax credit applied automatically?

Yes. The credit is calculated automatically 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 liabilities.

Source: landlordadvice.co.uk