Mortgage Interest and Tax for Landlords: How the Relief Works
For landlords who own property in their own name, mortgage interest gets tax relief in a particular way. It can make a big difference to your tax bill.
What to know
- Individual landlords can’t deduct residential mortgage interest as an expense. They get a tax credit instead.
- The credit is currently 20% of finance costs, whatever rate of tax you pay.
- From 6 April 2027, property income has its own tax rates of 22%, 42% and 47%, and the credit rises to 22%.
- Companies treat mortgage interest as a business cost, but face corporation tax and tax on extracting profits.
If you let residential property in your own name, mortgage interest doesn’t reduce your rental profit in the usual way. Instead, you get a tax credit at the basic rate. For higher-rate taxpayers, that means paying tax on profit before interest.
How the relief works now
- Work out your rental profit before finance costs, deducting allowable expenses such as letting fees, repairs and insurance.
- Pay income tax on that profit at your usual rate.
- Reduce the tax by 20% of your finance costs, such as mortgage interest.
The credit can be limited if your finance costs exceed your property profits or other income, and unused amounts can be carried forward.
A worked example
Rent of £12,000, other allowable expenses of £2,000 and mortgage interest of £6,000. Taxable property profit is £10,000. Figures are simplified and ignore allowances.
| Basic-rate taxpayer | Higher-rate taxpayer | |
|---|---|---|
| Tax on £10,000 profit | £2,000 (20%) | £4,000 (40%) |
| Less 20% credit on £6,000 | −£1,200 | −£1,200 |
| Tax to pay | £800 | £2,800 |
The higher-rate taxpayer pays tax at 40% on profit but gets relief at only 20% on the interest, which is why the rule hits them hardest.
Changes from April 2027
From 6 April 2027, property income has its own rates: 22% basic, 42% higher and 47% additional, two points above the main rates. Relief for finance costs rises to 22% at the same time. Using the example above with a higher-rate taxpayer, tax would be £4,200 less a credit of £1,320, giving £2,880. The new rates apply in England and Northern Ireland, and Scotland and Wales can set rates for their own taxpayers.
Good to know
Making Tax Digital for Income Tax now applies to landlords whose qualifying income is over £50,000, with the threshold falling to £30,000 from April 2027 and £20,000 from April 2028. Qualifying income is counted before expenses.
Owning through a limited company
A company deducts mortgage interest as a business cost and pays corporation tax on its profits. The main rate is 25%, with a small profits rate of 19% and marginal relief in between. Taking money out, for example as dividends, is taxed again. Moving existing properties into a company is usually treated as a sale, which can trigger Capital Gains Tax and Stamp Duty Land Tax.
Watch out
Tax depends on your whole financial position. Speak to a qualified tax adviser or accountant before changing how you own property.
Planning around the rules
Model your rent, costs and interest at today’s rates and at higher ones, and include the 2027 changes if you plan to hold beyond then. Lenders’ rental cover tests are a separate hurdle, so a property can pass the mortgage test and still be marginal after tax. Our guide to rental yield shows how to check the overall return.
Your questions
What counts as finance costs?
Mortgage interest, interest on loans to buy furnishings, and fees for arranging or repaying those loans. Capital repayments don’t count.
Does the 2027 change affect Scotland and Wales?
The new property rates apply in England and Northern Ireland. Scotland and Wales can set rates for their own taxpayers, so check the latest guidance if you live there.
Do I need Making Tax Digital as a landlord?
Making Tax Digital for Income Tax applies to sole traders and landlords with qualifying income over £50,000 from April 2026, over £30,000 from April 2027 and over £20,000 from April 2028.
This guide explains how UK borrowing works in general terms and isn’t financial advice. Rates, rules and lender criteria change, so check the details with the lender, GOV.UK or the Financial Conduct Authority before you decide. For advice on your own circumstances, speak to an FCA-authorised mortgage or financial adviser. If you borrow against your home, it may be repossessed if you do not keep up repayments.
