Mortgage Interest and Tax Relief in the UK: A Guide to Your Options

Mortgage interest relief refers to deductible mortgage interest costs from taxable income, which helps lower the overall tax liability. 

This tax relief was initially available to both homeowners and landlords, but over the years, the rules have changed significantly.

Tax rules in the UK are always evolving and changing for homeowners and landlords. In such instances it becomes especially challenging to navigate through the already complex process of mortgage interest and tax relief.

With various rules to consider for buy-to-let property, holiday lets, and properties held via limited companies, an understanding of mortgage interest relief is essential to the property investor seeking to handle finances efficiently. 

This guide covers existing tax relief available and how landlords can maximise their tax position.

Mortgage Interest Relief for Homeowners 

In today’s context, homeowners in the UK are not eligible to receive tax relief on mortgage interest payments. 

This was not always the case, as, before the year 2000, homeowners used to greatly benefit from Mortgage Interest Relief at Source (MIRAS), a scheme that allowed them to deduct mortgage interest from their taxable income.

MIRAS was introduced in 1983 to make homeownership more affordable, encourage affordable home ownership but due to fear of escalating house prices and inefficiency in the economy, it was abolished on 6 April 2000. 

Since then, homeowners, both first-time buyers and existing mortgage holders are no longer able to receive any tax relief on their mortgage interest.

Unlike landlords today, who still receive some form of mortgage interest relief, homeowners have to cover their mortgage costs entirely from their after-tax income. As a result, mortgage payments, including interest, are now considered a personal expense for homeowners with no further tax advantages. 

This policy change has marked a significant shift in property taxation, hence reinforcing a gap between homeownership and property investment.

Mortgage Interest Relief for Landlords

Landlords were previously benefiting greatly from full mortgage interest deductions when calculating their rental profits. 

Prior to April 2020, landlords were able to deduct 100% of their mortgage interest payments from rental income before determining their taxable earnings. This system was considerably reducing their tax liabilities, particularly for higher-rate landlords.

However, the UK government introduced a new system in 2017, which was fully implemented in April 2020. This system was bought in to limit the tax advantages for landlords by replacing direct deductions with a 20% tax credit on mortgage interest. This means:

• Landlords can no longer deduct Mortgage interest from their rental income.
• All landlords now receive only a 20% tax credit, regardless of their income tax band.
• Higher-rate (40%) and additional-rate (45%) taxpayers now pay more tax, as they no longer receive full relief at their tax rate.

These changes have negatively impacted individual landlords, and has led them to explore alternative options like building or transferring ownership of their properties to limited companies, where mortgage interest can still be deducted as a business expense.

Example: How Mortgage Interest Relief Changes Affect Landlords

Let’s say a landlord owns a buy-to-let property and earns £15,000 in annual rental income. Their mortgage interest payments are £6,000 per year. The landlord is a higher-rate taxpayer (40%).

Before 2020 (Old System – Full Deduction)

After 2020 (New System – 20% Tax Credit)

Comparison: Old vs New System

This example clearly shows how landlords who used to fully deduct mortgage interest now face higher tax bills, especially if they are in the higher tax bracket. 

Struggling to Understand Mortgage Tax Relief? Book a Free Consultation with a UK Accounting Expert Today!

Navigating the complexities of mortgage interest relief and tax regulations can be challenging, especially with frequent rule changes affecting landlords and property investors. At Heighten Accountants, we specialise in helping individuals and businesses optimise their tax position, ensuring they take full advantage of available reliefs while staying compliant with HMRC regulations.

Whether you’re a buy-to-let landlord, a Furnished Holiday Let owner, or considering setting up a limited company, our expert accountants can provide tailored advice to help you:

• Minimise tax liabilities and maximise tax relief
• Structure your property investments for long-term financial efficiency
• Understand Capital Gains Tax (CGT) and Inheritance Tax (IHT) implications

Book a FREE consultation today and get expert guidance on the best tax strategy for your property portfolio! Contact Heighten Accountants now.

Buy-to-Let and Holiday Lets 

Buy-to-let properties have always been a popular investment choice in the UK, but tax rules have changed significantly in the past couple of years. 

Since the April 2020 tax changes, landlords who pay tax at the basic rate (20%) are unaffected, but higher-rate (40%) and additional-rate (45%) taxpayers now face higher tax bills because they previously received more generous deductions.

In contrast with Buy-to-Let, Furnished Holiday Lets (FHLs) enjoy more favourable tax treatment. To qualify as an FHL, the property must be:

• Available for at least 210 days per year
• Actually rented out for at least 105 days per year

Unlike standard buy-to-let properties, FHL landlords can still fully deduct mortgage interest from their rental incomes, and reduce their taxable profit. 

Additionally, FHLs also qualify for capital allowances, meaning owners can now claim tax relief on furniture and equipment purchases.

Overall, tax relief is now more limited for buy-to-let investors, while FHL owners benefit from more generous tax deductions. This has led some landlords to convert their properties into holiday lets to take advantage of the better tax treatment.

Mortgage Interest Relief for Limited Companies 

After the 2020 tax change, Landlords who own rental properties through a limited company can still fully deduct mortgage interest as a business expense before calculating taxable profit. 

This is a significant advantage over individual landlords, who now receive only a 20% tax credit on mortgage interest. By operating through a limited company, as a landlord, you can reduce your taxable income and potentially pay less tax overall.

Why Are More Landlords Choosing Limited Companies?

Recently, more landlords have shifted to limited company structures for tax benefits. With changes to mortgage interest relief, this approach has become a cost-effective and tax-efficient strategy, particularly for those with multiple properties. Here is the reason why:

1. Full Mortgage Interest Deduction – Unlike individual landlords, limited companies can deduct 100% of mortgage interest before tax, lowering their taxable profits.
2. Lower Corporation Tax Rates – Instead of paying income tax at 40% or 45%, rental profits in a limited company are taxed at corporation tax rates (currently 25%), which can result in lower overall tax liability.
3. More Tax-Efficient Profit Extraction – Landlords can take income as dividends, which may be taxed at a lower rate than personal income tax. Alternatively, profits can be reinvested within the company for future property purchases.

Key Considerations before Switching to a Limited Company

While a limited company structure offers tax advantages, it also comes with potential costs and complexities. Landlords should carefully assess the financial and administrative implications before making the switch. Here are some key factors to consider:

• Mortgage Costs – Buy-to-let mortgages for limited companies often have higher interest rates and stricter lending criteria than personal mortgages.
• Stamp Duty and Capital Gains Tax (CGT) – Transferring properties from personal ownership to a limited company may trigger Stamp Duty Land Tax (SDLT) and CGT liabilities.
• Increased Administrative Burden – Running a company requires annual accounting, corporation tax returns, and compliance with Companies House regulations, adding to costs and complexity.

While a limited company structure can be highly tax-efficient, it is best suited for landlords with multiple properties or long-term investment plans. Seeking professional tax advice is essential before making the switch.

Other Mortgage-Related Tax Considerations 

Mortgage interest doesn’t just affect rental income tax—it also has implications for Capital Gains Tax (CGT) and Inheritance Tax (IHT) when selling or passing down property.

Capital Gains Tax (CGT) and Mortgage Interest

When a landlord sells a rental property, CGT is due on the profit (capital gain) made. However, mortgage interest is not deductible from this gain.

Unlike rental income tax, where landlords can claim some relief, CGT is based purely on the difference between the purchase price and selling price, minus allowable expenses like stamp duty and renovation costs. 

For individuals, CGT rates are 18% (basic rate) and 24% (higher rate) on residential properties.

Inheritance Tax (IHT) Considerations

Property investments are part of an individual’s estate and may be subject to 40% IHT upon death. Mortgages can help reduce the taxable value of an estate since only the net property value (after deducting mortgage debt) is considered. 

Some landlords use trusts or limited company structures to minimise IHT liability.

Tax-Saving Strategies

• Using a limited company to benefit from lower corporation tax rates.
• Transferring ownership to spouses in lower tax brackets.
• Holding properties in trusts to reduce IHT exposure.

Carefully structuring property investments can lead to significant tax savings while ensuring long-term financial security. Seeking professional tax advice is essential for landlords looking to optimise their tax position

Conclusion

Understanding mortgage interest relief is essential for landlords and property investors to manage tax liabilities effectively. 

While individual landlords now receive only a 20% tax credit, those operating through a limited company can still fully deduct mortgage interest, making it a more tax-efficient option. 

Furnished Holiday Lets (FHLs) also offer tax advantages over standard buy-to-let properties.

Additionally, landlords should consider the impact of Capital Gains Tax (CGT) and Inheritance Tax (IHT) when planning property investments. Strategic tax planning, such as using a limited company, trusts, or spouse transfers, can help optimise tax efficiency.

With ever-changing tax rules, staying informed and seeking professional tax advice is crucial to making the most of available tax reliefs. If you need guidance on structuring your property investments wisely, contact us today for expert advice!

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