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tax relief on mortgage interest

Explained: Buy to let Mortgage Interest Tax Relief

05/08/2022tax , VAT

In previous years, landlords in the UK could deduct mortgage interest payments directly from their rental income, significantly reducing their tax bill. However, since Section 24 of the Finance Act 2015 was fully implemented in April 2020, this is no longer the case.

The landlord tax landscape has shifted, and many landlords—particularly higher-rate taxpayers have faced increased tax liabilities as a result. If you’re a landlord wondering how this affects you and whether incorporation might help, this guide will give you a clear overview.

What Changed Under Section 24?

Prior to April 2020, landlords could offset 100% of their mortgage interest against their rental income. This meant you were taxed only on your net rental profit after deducting mortgage expenses.

Now, under the Section 24 rules, mortgage interest is no longer an allowable expense for individuals. Instead, all landlords—regardless of tax bracket—receive a basic rate tax credit of 20% on eligible interest payments.

Example:

  • You pay £8,000 in mortgage interest.

  • Under the old rules, this could reduce your taxable rental income by £8,000.

  • Under the new rules, you pay tax on the full rental income, then claim a 20% tax credit, saving just £1,600 instead of up to £3,200 if you were in a higher tax bracket.

Why This Matters for Higher-Rate Taxpayers

For basic rate taxpayers, the 20% tax credit largely aligns with their income tax rate—so the change is relatively neutral.

However, for higher-rate (40%) and additional-rate (45%) taxpayers, the financial impact is significant. You are now taxed at your full marginal rate on the gross rental income, without relief for interest costs, and only receive a 20% credit.

This can:

  • Push your total income into a higher tax bracket

  • Reduce your personal allowance if your income exceeds £100,000

  • Affect eligibility for child benefit, pension contributions, or student loan repayments

Why Your Tax Bill May Appear Higher

With no interest deduction, your taxable rental income increases—even though your real (cash-based) profit hasn’t changed. This results in higher reported income on your Self Assessment tax return and, in many cases, a higher tax bill.

Other forms of income—such as employment, pensions, or dividends—may also compound this effect.

Is Incorporating a Buy-to-Let Business the Solution?

One increasingly popular strategy is setting up a limited company to hold your rental properties.

Incorporated landlords (i.e. companies) can still treat mortgage interest as a deductible expense before calculating corporation tax (currently 25%), rather than dealing with the Section 24 restrictions.

Potential Benefits:

  • Deduct full mortgage interest

  • Lower effective tax rate (corporation tax vs personal income tax)

  • Greater flexibility on reinvesting profits

  • Retain earnings within the company

Considerations:

  • You’ll face additional accounting and legal costs

  • Transferring properties from personal to company ownership may trigger:

    • Stamp Duty Land Tax (SDLT)

    • Capital Gains Tax (CGT)

    • Mortgage refinancing requirements

Before incorporating, it’s crucial to weigh the long-term financial impact, as it’s not a one-size-fits-all solution.

Making Tax Digital (MTD) – What Landlords Need to Know in 2025

Another key development affecting landlords is Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA).

From April 2026, landlords with property income over £50,000 per year must:

  • Keep digital records

  • Use HMRC-compliant software

  • Submit quarterly updates and an end-of-year finalisation

MTD will apply to those earning over £30,000 from April 2027, with a pilot scheme already in place. If you’re affected, preparing now can make the transition smoother.

Can You Still Claim Any Relief?

Yes – although full mortgage interest relief is gone, you still receive:

  • A 20% tax credit on eligible interest

  • Deductions for other allowable expenses, including:

    • Letting agent fees

    • Repairs and maintenance

    • Property insurance

    • Council tax and utility bills (if paid by landlord)

Keeping good records and understanding what you can still claim is key to minimising your tax bill.

The Bottom Line

Section 24 has significantly changed how landlords are taxed in the UK. While you can no longer deduct mortgage interest from your rental income, you do receive a 20% tax credit. This change hits higher-rate taxpayers hardest and has prompted many to consider incorporating their property business.

If you’re a landlord with a growing portfolio—or you’re concerned about rising tax bills—speak to an accountant before making decisions. Incorporation may help, but only if structured correctly.

Our team of professional members loves to hear out your business problems and find out the possible and suitable solutions quickly. Call us on 02086868876 or email us today. We will come up with fine solutions.

Disclaimer: The information about tax relief on mortgage interest provided in this blog includes text and graphics that are general. This does not intend to disregard any of the professional advice.

   

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