Mortgage interest relief changes and what they mean now

e tax change that keeps on biting.

The old system, where individual landlords could broadly deduct mortgage interest and other finance costs from rental income before working out taxable profit, has gone.

In its place is a basic rate tax reduction.

That sounds technical, but the effect can be very real: higher taxable rental profits, a bigger tax bill for higher- and additional-rate taxpayers, and knock-on problems for personal tax bands, child benefit, and pension tapering.

If you own buy-to-let property personally, the rules matter every year you file a tax return.

If you are thinking about buying, refinancing, or moving property into a company, they matter before you make a decision.

The detail also matters, because a lot of landlords still use old language such as "deducting the mortgage" when that is no longer how it works for most residential lettings held in personal names.

This guide sets out what changed, how the current rules work, who is affected, and what practical planning points are worth reviewing now.

What exactly changed?

Before the restriction was phased in, an individual landlord could normally include mortgage interest, arrangement fees and certain other finance costs as an expense in the rental accounts.

If rent was £15,000 and mortgage interest was £8,000, taxable rental profit might have been only £7,000, before other allowable expenses.

That treatment was gradually replaced and now, for most individual landlords with residential property, finance costs are not deducted in arriving at taxable rental profit.

Instead, the landlord works out the rental profit before those finance costs, adds that figure to their total taxable income, and then claims a basic rate tax reduction equal to 20% of the lower of:

• the finance costs for the year,

• the property business profits for the year, and

• the landlord's adjusted total income above the personal allowance.

This is widely referred to as "Section 24", although landlords often use that label to describe the whole restriction rather than the specific legislation.

The rules apply to finance costs on residential property held personally or through a partnership of individuals.

They do not generally apply in the same way to:

• property held in a limited company, where mortgage interest is normally still deductible as a business expense subject to the usual corporation tax rules,

• furnished holiday lettings for periods when the old FHL tax regime still applied in full, though that area has changed and needs separate checking for current treatment,

• commercial property lettings in many cases, where the restriction is not the same issue.

Why the current system catches landlords out

The biggest source of confusion is that tax is no longer calculated only on the landlord's "real cash profit" after mortgage payments.

HMRC is interested in taxable profit under the current rules, and those figures can look much higher than the money left in your bank account.

Take a simple example.

Emma owns a flat in Manchester in her own name.

Annual rent is £18,000.

Other allowable expenses are £2,000.

Mortgage interest is £10,000.

Under the old method, her rental profit would have been:

£18,000 less £2,000 less £10,000 = £6,000

Under the current method, her rental profit is:

£18,000 less £2,000 = £16,000

She then gets a tax reduction of 20% of the eligible finance costs, subject to the limits above.

If she is a higher-rate taxpayer paying tax at 40%, the result is very different from full deduction of the interest.

At 40%, tax on £16,000 is £6,400.

Her finance cost tax reduction is £2,000 (20% of £10,000).

Net tax linked to the property profit is therefore £4,400.

Under the old rules, tax at 40% on a profit of £6,000 would have been £2,400.

That is a £2,000 difference, which is exactly the extra tax cost created because relief has effectively been restricted from 40% to 20%.

Which finance costs are covered?

The restriction is wider than just monthly mortgage interest.

It can apply to several finance-related costs connected with residential lettings, including:

• interest on buy-to-let mortgages,

• interest on loans used to buy or improve residential rental property,

• mortgage arrangement fees and similar loan fees spread or treated under the relevant tax rules,

• certain alternative finance payments.

The key test is often what the borrowing was used for, not simply whether the loan is secured on the rental property.

A landlord may, for example, refinance a property and still claim relief on interest up to the value of the property when first introduced to the letting business, depending on the facts.

Equally, borrowing for private purposes dressed up as property finance does not become deductible just because a rental property sits in the background.

This is one area where records matter.

If you have redrawn borrowing over the years, released equity, or mixed personal and property use, it is worth tracing how the funds were used rather than assuming all interest qualifies.

Who feels the impact most?

Not all landlords suffer in the same way.

The practical effect depends on tax band, mortgage size, and the balance between rent and interest.

Basic rate taxpayers

If all of your income sits within the basic rate band, the restriction may appear less painful because the tax reduction is also at 20%.

In straightforward cases, the result can be similar to the old position.

But even basic rate taxpayers can be caught where the inflated rental profit pushes total income high enough to create other tax effects.

Higher-rate and additional-rate taxpayers

This group usually feels the direct cost most clearly.

Instead of receiving relief at 40% or 45%, finance costs only generate a 20% reducer.

The larger the mortgage, the more expensive the difference becomes.

Landlords near key thresholds

Even where the direct tax on rental profit seems manageable, the enlarged income figure can create secondary problems:

• pushing income into the higher-rate band,

• triggering the High Income Child Benefit Charge,

• reducing the personal allowance once adjusted net income exceeds £100,000,

• affecting pension annual allowance tapering for some higher earners,

• increasing student loan repayment exposure in some cases.

That is why landlords sometimes say, quite reasonably, that they are being taxed on "profit they have not really made".

It is not literally correct in tax terms, but it reflects the cash-flow strain of the current system.

"The tax restriction does not mean mortgage interest gets no relief at all.

It means relief is given in a different and often less valuable way, especially for landlords paying tax above the basic rate."

A side-by-side example: same property, different taxpayer

Consider a landlord in Leeds with:

• annual rent of £24,000,

• other allowable expenses of £3,000,

• mortgage interest of £13,000.

The taxable property profit is £21,000.

The finance cost tax reduction is £2,600, assuming full relief is available.

Cash-wise, the landlord's rough surplus before tax is £24,000 less £3,000 less £13,000 = £8,000.

Yet the tax bill linked to the property could be £5,800 or £6,850 if the landlord is already in a higher band.

That is why heavily mortgaged portfolios can become much less viable when interest rates rise.

Interest rate rises made the rule much more painful

When borrowing costs were relatively low, some landlords absorbed the relief restriction without radical changes.

The recent period of higher rates changed the arithmetic.

A rule that was awkward at 2% interest can become brutal at 6% or more, particularly on interest-only lending.

Suppose a landlord with a £250,000 interest-only mortgage saw annual interest rise from £5,000 to £15,000.

For a higher-rate taxpayer, the difference is not merely the extra £10,000 in interest.

There is also the issue that relief on that extra £10,000 is limited to 20% rather than 40%.

That means a further £2,000 of tax cost compared with the old system, on top of the increased financing cost itself.

How the restriction affects tax returns in practice

For self assessment, the rental profit is worked out before restricted finance costs, and the tax reduction is then applied later in the tax calculation.

This means landlords reviewing only the property pages can miss the real effect unless they look at the full tax computation.

Three practical issues come up repeatedly:

1.

Payments on account can jump

If your tax bill rises because taxable rental profit is higher, HMRC may also increase payments on account for the next year.

Landlords sometimes focus only on the balancing payment due by 31 January and forget that the same date can also bring the first payment on account for the following year.

2.

Losses and carried-forward finance costs are not the same thing

If finance costs are more than the amount that can be relieved through the basic rate reduction, there can be unused finance costs carried forward.

That is different from a standard property business loss.

The rules here are technical, and it is important to track these amounts correctly.

3.

Joint ownership needs checking

For married couples and civil partners, the default tax split for jointly owned property is often 50:50 unless a valid Form 17 election and beneficial ownership evidence support a different split.

Mortgage interest restriction is then considered within each person's tax position.

A couple where one spouse is a basic rate taxpayer and the other is an additional-rate taxpayer may want to review whether current ownership proportions still make sense, taking legal and tax advice before changing anything.

Common misunderstandings landlords still make

Several myths keep circulating.

"I can deduct the whole mortgage payment"

No.

Even before the restriction, capital repayment was not an allowable revenue expense.

Only the interest element and certain finance costs were relevant for relief.

Repaying the loan principal is not a deductible day-to-day expense for rental profit purposes.

"I am only affected if I own lots of properties"

Not true.

A single highly mortgaged flat can be enough, particularly if you are already close to the higher-rate threshold.

"If my property makes little cash profit, I should pay little tax"

Not necessarily.

The tax system does not simply follow cash surplus after finance costs for personally owned residential lettings.

"Putting property into a company always solves it"

A company can restore full deduction for mortgage interest in many cases, but incorporation has its own costs and tax traps.

Stamp Duty Land Tax, capital gains tax, mortgage complications, legal costs and the tax on extracting profits all need proper comparison.

There is no universal answer.

Should landlords consider a limited company now?

This is the question many landlords ask once they see how the current rules work.

For new purchases, buying through a company may look attractive because mortgage interest is generally deductible for corporation tax purposes.

But the right structure depends on more than that single issue.

A company can be helpful where:

• profits will be retained for reinvestment rather than extracted personally each year,

• the investor expects to remain highly geared,

• personal income is already in higher or additional-rate bands,

• long-term expansion is planned.

But companies can be less attractive where:

• the landlord needs most profits personally to live on,

• mortgage rates for limited company borrowing are materially worse,

• the portfolio is small and transfer costs would be high relative to expected benefit,

• selling properties personally might attract lower effective tax in some future scenarios than extracting company sale proceeds.

There is also the question of moving existing property into a company.

That is not usually a tax-free paper exercise.

A transfer can trigger:

• Capital Gains Tax based on market value, even if no cash changes hands in the expected sense,

• Stamp Duty Land Tax for the company, usually based on market value and including any surcharge where applicable,

• mortgage redemption and new borrowing fees,

• consent and legal issues with lenders and co-owners.

Some landlords hear about incorporation relief or partnership routes and assume these solve everything.

Sometimes they help, sometimes they do not.

HMRC and the courts will look at whether there is a genuine business and whether legal conditions are met.

This is not an area for guesswork.

Practical planning steps short of incorporation

For landlords keeping property in personal ownership, there are still sensible points to review.

1.

Check ownership split

Where property is owned jointly by spouses or civil partners, a different beneficial ownership split may improve the overall household tax result if done properly.

That needs legal reality, not just an idea written on paper after the event.

2.

Review debt level and refinancing strategy

Many landlords focus on chasing tax relief that no longer exists instead of asking a broader question: is the current borrowing level still commercially sensible?

Paying down debt may give a lower guaranteed return than another investment, but it may also reduce tax pressure and improve cash flow resilience.

3.

Separate repairs from capital improvements

This does not alter mortgage interest relief, but it matters because landlords under pressure often miss other valid deductions.

Revenue repairs are usually deductible; capital improvements are usually not deducted from rental income, though they may count for Capital Gains Tax later.

4.

Forecast tax before 31 January arrives

Waiting until the tax return deadline to discover the bill is a bad habit.

A mid-year estimate can help you budget for both the balancing payment and payments on account.

5.

Watch personal tax thresholds

If rental profits before finance costs are pushing your income over key thresholds, pension contributions or gift aid can sometimes help adjusted net income, depending on the wider circumstances.

This needs proper calculation because tax interactions are rarely straightforward.

A practical review checklist for landlords

If you own residential buy-to-let property personally, this is a sensible annual review list:

• Confirm total rent received and all non-finance allowable expenses.

• Separate mortgage interest and related finance costs from other expenses.

• Check whether all borrowing was used for the property business.

• Estimate taxable rental profit before finance costs.

• Estimate the 20% finance cost tax reduction.

• Review whether your total income now crosses the higher-rate threshold, the child benefit charge threshold, or the £100,000 personal allowance taper point.

• Check whether any unused finance costs need carrying forward.

• Review whether joint ownership proportions are still tax-efficient and legally correct.

• Budget for 31 January and 31 July payments on account if relevant.

• Consider whether refinancing, debt reduction or structural change is commercially worthwhile rather than simply tax-driven.

Worked example: when a "profitable" let feels unworkable

Raj owns two terraced houses in Nottingham in his own name.

Total annual rents are £31,200.

Repairs, insurance, agent fees and other allowable non-finance expenses come to £4,200.

Mortgage interest is £18,000 after a refix at a much higher rate.

His cash surplus before tax is only £9,000.

For tax, the property profit is £27,000.

Raj also has salary income of £32,000.

That means his total income for tax purposes is pushed much higher than he expected.

Part of his income moves into the higher-rate band.

He then gets a 20% tax reduction on the £18,000 finance costs, worth £3,600.

What often shocks landlords in this position is not just the final tax bill, but the mismatch between:

• cash left after mortgage interest, and

• taxable income before mortgage interest.

Raj may still be making a genuine economic profit over time once capital growth is factored in, but that does not help cash flow now.

If maintenance spikes or a property is vacant, the strain becomes obvious.

What about furnished holiday lets and mixed portfolios?

Landlords with mixed portfolios need extra care.

Different property types can have different tax treatment, and the treatment of furnished holiday lettings has been subject to legislative change.

If you have holiday accommodation, standard residential AST properties, and perhaps a shop with a flat above, do not assume one simple rule covers the lot.

The finance cost restriction discussed here is mainly about residential property income held personally.

Commercial property and company-held property often follow different principles.

Mixed-use properties can add another layer, especially where borrowing relates to several assets.

Where there is any complexity, the key is to classify the property business correctly first, then test the finance costs against the right rules.

Record-keeping points that make a real difference

Landlords often underestimate how much easier good records make this area.

Keep:

• annual mortgage statements showing interest paid,

• loan agreements and remortgage paperwork,

• completion statements for purchases and refinances,

• a schedule showing what borrowed funds were used for,

• ownership documents where beneficial interests differ from legal title,

• working papers for any carried-forward unused finance costs.

This is particularly important if you have refinanced several times or introduced a former home into the letting business.

HMRC may not ask immediately, but if a return is checked later, reconstructed evidence is always weaker than records kept at the time.

What the changes mean now for decision-making

The mortgage interest relief changes are no longer "new", but their effects are still current because interest rates, tax thresholds and property yields keep changing.

For landlords, the practical message is simple: ignore the old assumptions.

If you own residential property personally, you should assess performance using at least three figures, not one:

• cash surplus after all actual costs including mortgage interest,

• taxable rental profit before restricted finance costs,

• final tax payable after the 20% finance cost reduction and interaction with your wider income.

Only when you look at all three do you see whether a property is still doing the job you want it to do.

For some landlords, the answer will be to hold and accept lower net returns.

For others, it may mean reducing debt, changing ownership arrangements, reviewing rents where the market allows, or considering a company structure for future purchases rather than transferring existing stock.

For a few, it will mean selling weaker properties that no longer stack up once tax and finance are properly accounted for.

What matters most is using current UK tax rules rather than old buy-to-let folklore.

Mortgage interest relief did not disappear entirely, but the way it works now can change your tax band, your cash flow and the long-term shape of your property business.

That is why it still deserves a fresh review, even years after the original change took effect.