Restricting mortgage interest relief: At a glance

Since April 2020, individual landlords' tax relief for finance costs on residential property has been limited to the basic rate of Income Tax. How is the relief calculated? How were the provisions introduced? 

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This is a freeview 'At a glance' guide considering the restricted relief available to residential buy-to-let landlords for the costs of finance, such as mortgage interest.

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At a glance

• From April 2020, relief for mortgage interest and other finance costs on residential property is restricted to the basic rate of Income Tax (20%).
  • This change was phased in over three years from April 2017.
• It means that all finance costs (not just loan interest) will no longer be an allowable expense when calculating your taxable rental profits.
• Individual landlords are required to make a tax return adjustment.
• The adjustment will give you a basic rate tax deduction after the rental profits have been taxed. 
• This measure impacts all taxpayers who incur finance costs who report rental income under Self Assessment and not just higher rate taxpayers.
• Finance costs include mortgage interest, any payments that are equivalent to interest, and incidental costs of obtaining finance, such as fees and commissions, legal expenses for negotiating to draft loan agreements, or valuation fees required to provide security for a loan.

Who is affected?

• These rules only apply to individuals with residential property businesses.
• They do not apply to companies.
• They do not apply to land and property dealing or development businesses, commercial lettings or Furnished Holiday Lets. 

For the impact on partnerships and trusts, see Restricting mortgage interest relief (subscriber guide).

Complications for basic rate taxpayers

• These provisions can lead to taxpayers who would otherwise have been paying tax at the basic rate becoming higher-rate taxpayers, once the finance costs are disallowed.
• Your tax liability depends on your other income and the amount of finance costs that are added back.
• You will not know whether the adjustment will take you into a higher rate tax without going over a series of steps in order to work out the effect of the change. 
• If you do become a higher-rate taxpayer after arriving at your rental profits, you will lose higher-rate tax relief on your finance costs.

Practical considerations

• The increase in taxable rental profits can lead to an increase in your total income for tax.
• The knock-on effects depend on your personal circumstances, other income, capital gains and other reliefs.
  • For example, there is an impact for anyone claiming tax credits or if you or your partner claim child benefit and the change increases your income above £50,000; child benefit can be clawed back under the High-Income Child Benefit Charge (HICBC).
• You could find that you are paying tax at 40% or higher or that capital gains are taxed at 20%/28% instead of 10%/18%.
• You may be able to reduce your taxable income if you make pension contributions or Gift Aid donations.
• If you plan ahead you may be able to anticipate whether you are likely to become a higher-rate taxpayer as a result of the adjustments.

Phased introduction

The change was introduced as follows:

Further restrictions

A basic rate deduction is available and applied to disallowed finance costs. The deduction is restricted when:

• Property profits are less than finance costs, the deduction is limited to the basic rate of tax multiplied by property profits. The reduction does not reduce tax payable on other sources of income.
• There are property losses brought forward, these must be set against property profits and could reduce the taxable profit to less than the finance costs. Here the deduction is limited to the basic rate band multiplied by taxable profits.
• Total income is low (excluding any savings or dividend income which are taxed as top-slices), so that some or all of the rental profits fall within the personal allowance, here the deduction is restricted to the basic rate band applied multiplied by the profits that are actually taxed.

When there is a restriction, any finance costs which have not been used to calculate the basic rate deduction in one year can be carried forward and added to the finance costs of the following year.

For worked examples see: Restricting mortgage interest relief (subscriber guide)

Useful guides on this topic

Restricting mortgage interest relief (subscriber guide)
This practical guide explains the detail behind the restriction on interest relief, it comes with examples to assist landlords in making the right choices in restructuring their property businesses.

Incorporating a buy to let business
This guide illustrates some of the tax savings that may be achieved by running the business via a company.

Our Land & Property section
This contains our guides on this topic.