Is the Interest on the Mortgage Tax Deductible? A Complete Guide to Tax Relief for Homeowners & Landlords in the UK

Understanding the rules and implications of mortgage interest tax relief can be a game-changer for property owners and landlords. It directly impacts how much you pay in taxes and, by extension, how much profit you can make from your property investments. Whether you’re a homeowner or a buy-to-let landlord, tax relief on mortgage interest can help reduce your tax burden. But the question remains: is mortgage interest tax-deductible? The answer is a bit more complex than you might expect.

In this article, we will break down the rules surrounding mortgage interest tax relief in the UK, covering all the essential aspects for both homeowners and property investors. We’ll discuss eligibility, the impact of the tax changes, and how you can potentially save money. So, whether you're looking to maximise your tax relief or simply stay compliant, this guide has everything you need to know.

Key Takeaways

• Mortgage interest tax relief is not available to homeowners on their primary residence in the UK.

• Buy-to-let landlords can claim mortgage interest relief, but this has changed over time, especially with the introduction of tax credits in place of full deductions.

• Limited company landlords may receive more favourable tax treatment of mortgage interest.

• The tax relief rules differ for various property types, including buy-to-let, holiday lets, and residential properties.

Understanding Mortgage Interest Tax Relief in the UK

Mortgage interest tax relief was once available to homeowners on their primary residence, allowing them to deduct interest payments from their income, thereby lowering their taxable income. However, as of recent reforms, this is no longer the case for residential properties.

For buy-to-let landlords, mortgage interest relief is still available, but it’s undergone significant changes over the past few years. Historically, landlords could deduct the entire mortgage interest from their rental income before calculating tax. But this changed with reforms that started in 2017 and culminated in 2020. Instead of deducting interest from rental income, landlords now receive a 20% tax credit for the mortgage interest they pay.

This shift in the tax relief structure was implemented to level the playing field between individual landlords and larger institutional investors, who often use different structures to mitigate taxes. Property owners need to understand how these changes affect their tax positions.

What is Mortgage Interest Tax Relief?

Mortgage interest tax relief allows property owners, particularly landlords, to reduce their taxable income by deducting mortgage interest. In the past, this meant that landlords could reduce their taxable rental income by the full amount of interest paid on the mortgage.

However, as of the last few years, this system has changed. For individuals who own buy-to-let properties, mortgage interest relief is now a tax credit rather than a full deduction from rental income.

Who Can Claim Mortgage Interest Tax Relief?

Eligibility Criteria for Homeowners

As mentioned earlier, homeowners in their primary residence cannot claim mortgage interest as a tax deduction. Historically, this was available, but changes in tax law have removed this benefit for residential properties.

Homeowners still enjoy other potential tax benefits, such as the Capital Gains Tax exemption on the sale of their primary residence, provided certain conditions are met. However, when it comes to deducting mortgage interest, that is no longer possible.

Eligibility for Landlords and Property Investors

For buy-to-let landlords, the situation is different. These property owners can still claim mortgage interest tax relief, but they need to be aware of the changes to the rules. Before the 2020 reforms, landlords could deduct the full amount of mortgage interest from their rental income, thus reducing their taxable income. Now, the tax relief comes in the form of a 20% tax credit on mortgage interest paid.

This tax credit is applied after calculating the rental income, which means landlords may not see as significant a reduction in their tax bill as they did before. However, for many, it’s still a meaningful way to reduce overall tax liabilities.

Mortgage Interest Tax Relief for Buy-to-Let Landlords

Buy-to-let mortgage interest relief has been a significant topic for landlords for years. Previously, it allowed landlords to deduct the full cost of mortgage interest from their rental income before calculating their tax. Use the mortgage calculator to estimate monthly payments and potential tax relief based on your mortgage interest. However, this changed when the UK government restructured the tax relief system.

Under the new system, landlords no longer get to deduct their mortgage interest in full. Instead, the tax relief is now offered as a 20% tax credit. This means if a landlord pays £10,000 in mortgage interest, they’ll receive a tax credit of £2,000 (20% of £10,000), rather than being able to deduct the full £10,000 from their taxable income.

The purpose of this change was to limit the amount of tax relief given to landlords who are in higher income tax brackets. Previously, higher-rate taxpayers could benefit from a larger tax reduction, but under the new system, this has been capped at the 20% introductory rate.

Example: Calculating Buy-to-Let Tax Relief in 2025-2026

Let’s break down an example to show how this tax relief works.

• Scenario: A landlord owns a buy-to-let property and pays £12,000 in mortgage interest annually.

• Pre-2020 System: The landlord could deduct the full £12,000 from their rental income, reducing the taxable income by that amount.

• Post-2020 System: The landlord would no longer be able to deduct the £12,000. Instead, they would receive a 20% tax credit on the interest paid. In this case, they would receive £2,400 (20% of £ 12,000) as a tax credit to reduce their overall tax liability.

This change means that while landlords can still claim mortgage interest relief, they now need to pay attention to the tax credit system and plan accordingly.

Why More Landlords Are Choosing Limited Companies

One of the key changes in the mortgage interest relief system has been the increasing number of landlords choosing to operate their property businesses through a limited company structure.

Operating as a limited company has tax advantages, particularly for larger portfolios. Limited companies are subject to corporation tax instead of personal income tax. This allows property owners to claim full mortgage interest deductions, which can be far more beneficial than the new tax credit system for individual landlords.

Additionally, limited companies offer more favourable tax treatment of profits and the potential to reinvest in property without incurring additional personal tax costs.

How Limited Companies Claim Tax Relief on Mortgage Interest

Landlords who choose to use a limited company to own and manage their rental properties can still claim full deductions for mortgage interest paid. This is one of the main benefits of operating through a limited company structure. Unlike individual landlords, companies can still deduct the full amount of mortgage interest, which can significantly lower their tax burden.

Key Considerations Before Incorporating as a Landlord

Before making the switch to a limited company, landlords should consider several factors:

• Additional Costs: Incorporating a business involves set-up costs, accounting fees, and further tax filings.

• Tax Implications: While the tax relief on mortgage interest is greater for limited companies, profits from property sales may be subject to Capital Gains Tax (CGT).

• Long-Term Strategy: Incorporating is often more beneficial for landlords with larger portfolios, as it provides flexibility for future growth.

Tax Implications for Different Taxpayers

Higher-rate taxpayers, including those who earn significant income from property investments, face different challenges under the changes to mortgage interest relief. Under the old system, they benefited from a higher deduction rate, but with the introduction of the tax credit, this advantage has been limited.

For higher-income landlords, the 20% tax credit may not fully offset the lost deductions, so they might pay more tax than they would have before. Therefore, higher-rate taxpayers should explore other tax-saving strategies, such as using a limited company or considering different forms of property ownership.

Tax Relief for Non-UK Residents with UK Property

Non-UK resident landlords are still eligible for mortgage interest tax relief, but the rules can be a bit more complicated. In some cases, they may need to register with HMRC and comply with specific tax reporting requirements. Non-UK residents need to stay updated on the latest rules to avoid any penalties.

What Has Changed? Mortgage Interest Relief Reform

Before 2017, landlords could deduct the full amount of mortgage interest from their rental income, meaning they paid tax only on the remaining profit after interest was deducted. This made a significant difference for many landlords, particularly those with large portfolios or high mortgage payments, as it substantially reduced their taxable income.

However, this system was gradually phased out between 2017 and 2020, with the introduction of new tax reforms designed to standardise the way mortgage interest relief is claimed. By 2020, the previous system of full mortgage interest deductions was replaced entirely by the 20% tax credit system for buy-to-let landlords.

The purpose of this change was to level the playing field for all landlords, but especially to curb the tax advantages for those in higher income brackets. As a result, while the changes affected all property investors, those earning higher rental income or holding larger property portfolios were most affected.

Changes in 2025: What Property Owners Should Expect

Landlords will likely face further refinements to the current tax system. As the UK property market continues to evolve, tax reforms might focus more on sustainability and green investments, as well as efforts to tackle housing affordability. Property owners should stay up to date on potential changes in 2025 and beyond, as these could affect how mortgage interest relief is applied or who qualifies for it.

Key Tax Considerations for Property Owners

Capital Gains Tax (CGT) and Mortgage Interest

When selling a property, landlords often need to account for Capital Gains Tax (CGT), which is applied to the profit from the sale. This is especially relevant for buy-to-let landlords who have owned property for several years.

Although mortgage interest is not directly linked to CGT, the amount of tax relief a landlord receives on mortgage interest payments can affect their overall taxable income. For instance, mortgage interest deductions (or the tax credit) may lower taxable rental income, which could, in turn, reduce a landlord’s overall tax liability.

It’s crucial to understand that CGT applies to the gain made when a property is sold, and it’s calculated on the difference between the sale price and the price paid for the property (minus any allowable costs, such as improvements). However, there’s no relief for mortgage interest in the calculation of CGT.

Landlords should plan accordingly, especially if they’re considering selling a property in the near future. By understanding how mortgage interest relief interacts with CGT, they can better manage their property investment strategy.

Inheritance Tax (IHT) Considerations for Landlords

For landlords with significant property holdings, Inheritance Tax (IHT) could be a crucial consideration. IHT is typically levied on the estate when a property owner dies, with a tax applied to assets above the tax-free allowance (currently £325,000 for individuals).

Mortgage interest is not deductible for IHT purposes, meaning landlords may have to pay tax on the full value of their property, including the mortgage debt. However, there are ways to reduce potential IHT liabilities, such as transferring properties into a limited company or using trusts.

If you're a landlord with an extensive portfolio, it's advisable to speak with a financial planner about the best strategies to reduce IHT liability. For example, transferring your portfolio into a limited company could shield it from IHT while still allowing full mortgage interest deductions.

How Refinancing Affects Your Tax Relief

Refinancing a mortgage can impact your mortgage interest tax relief, particularly for landlords. When refinancing a property, the terms of the new mortgage may change, affecting the amount of interest you pay.

Suppose you refinance to release equity (for example, by increasing your mortgage to access cash for further property investments). In that case, the interest on the additional amount may or may not be tax-deductible, depending on how the funds are used. If the money is used for investment purposes (such as purchasing another rental property), the interest may still be eligible for tax relief. However, if it's used for personal reasons, it may not be.

Using Home Equity for Investment and Tax Strategy

For buy-to-let landlords, using home equity to fund new property investments is a common strategy. If a landlord refinances to access equity and invests that money in another rental property, the interest on the latest mortgage could be eligible for tax relief, depending on the circumstances.

The key is ensuring that the funds are used in line with HMRC’s requirements. If you’re considering refinancing to access equity, it’s essential to document how the funds are spent and ensure they're used for investment purposes related to your rental business.

Frequently Asked Questions (FAQs)

Can I Claim Mortgage Interest Deduction on My Primary Residence?

Unfortunately, homeowners who live in their primary residence can no longer claim mortgage interest tax deductions. This rule has been in place since 2000, and although previous systems allowed such deductions, current laws do not provide any relief for mortgage interest on a primary residence. However, homeowners may still qualify for other reliefs, such as a Capital Gains Tax exemption under specific conditions when selling the property.

How Much Mortgage Interest Can I Deduct as a Landlord?

If you’re a buy-to-let landlord, you cannot directly deduct mortgage interest from your rental income. Instead, you receive a tax credit of 20% of the interest you paid on your mortgage. This applies to all landlords, regardless of their tax bracket.

For example, if your mortgage interest totals £10,000 in a year, your tax credit would be £2,000 (20% of £10,000). The tax credit reduces your overall tax liability, but it does not reduce your taxable rental income in the same way that previous mortgage interest deductions did.

Can I Still Claim Mortgage Interest Relief if I Own a Property Through a Limited Company?

Yes, if you own a property through a limited company, you can still deduct the full amount of mortgage interest paid. This is one of the main advantages of operating a property portfolio through a limited company. The mortgage interest deduction applies as a normal business expense and reduces the company’s taxable profit, which is then subject to corporation tax instead of personal income tax.

What Documentation is Required to Claim Mortgage Interest Relief?

To claim mortgage interest relief, landlords must keep accurate records of all mortgage interest payments, including lender documentation (such as annual or mortgage statements) and any other relevant receipts or documents. It’s crucial to keep records in case of an HMRC audit or tax review.

How Can I Minimise My Tax Liability as a Property Investor?

To minimise your tax liability as a property investor, consider the following strategies:

• Use a limited company for property ownership to benefit from full mortgage interest deductions.

• Track allowable expenses carefully and ensure you claim all eligible deductions (e.g., maintenance, insurance, management fees).

• Consider tax-efficient structures like trusts or joint ownership to spread out your tax liabilities.

• Consult with a tax professional regularly to ensure you are up-to-date with any tax reforms and strategies that can benefit your property investment portfolio.

Professional Tax Advice: When to Seek Help

Tax planning is essential for anyone involved in property investment. The rules around mortgage interest tax relief can be complicated, especially for buy-to-let landlords, limited company owners, and higher-rate taxpayers. If you are unsure about how to optimise your tax position, it is highly recommended that you consult with a professional tax advisor. They can guide you on the best strategies to minimise tax liabilities and maximise your available tax credits.

At Property Store, we offer a range of resources and tools to help landlords and property investors manage their tax obligations more efficiently. Whether you’re starting in property investment or managing an extensive portfolio, getting professional tax advice can help you make more informed decisions and potentially save significant amounts of money.