Tax relief on mortgage interest for rented property has fundamentally changed for UK landlords. Since April 2020, mortgage interest relief is restricted to the basic rate of tax (20%) regardless of your overall income level. This restriction, known as Section 24, affects how much tax relief you can claim on buy-to-let mortgage costs.

Understanding how mortgage interest tax relief works is crucial for property investors. The rules differ significantly from pre-2017 regulations, and many landlords still struggle with the practical implications of these changes.

How Mortgage Interest Tax Relief Works Under Section 24

Before Section 24 was introduced, landlords could deduct mortgage interest as an allowable expense against their rental income. If you were a higher-rate taxpayer paying 40% tax, you effectively received 40% relief on your mortgage interest.

Now, mortgage interest relief is capped at the basic rate (20%), delivered as a tax credit rather than a deduction. This means:

  • Mortgage interest is no longer deducted from rental income when calculating profit
  • You receive a tax credit equal to 20% of your mortgage interest costs
  • The restriction applies regardless of your marginal tax rate
  • Other financing costs (arrangement fees, survey costs) are also restricted

For example, a higher-rate taxpayer with £10,000 annual mortgage interest now receives £2,000 tax relief (20% × £10,000) instead of the previous £4,000 relief (40% × £10,000).

What Mortgage Costs Can You Claim Relief On?

The Section 24 restriction applies to various financing costs associated with your rental property:

  • Mortgage interest payments - the main component affected
  • Loan arrangement fees - setup costs for mortgages
  • Mortgage broker fees - professional arrangement costs
  • Survey and valuation costs - required for mortgage applications
  • Legal fees - for mortgage documentation (not property purchase)
  • Interest on loans - for property improvement or deposit funding

Important: Capital repayments on your mortgage are not allowable for tax relief. Only the interest portion of your mortgage payments qualifies for relief under the basic rate restriction.

Calculating Your Mortgage Interest Tax Relief

The calculation works differently depending on your total income level. Here's how it applies:

Basic Rate Taxpayers

If your total income keeps you in the basic rate tax band, the practical effect is similar to the old system. You receive 20% relief on mortgage interest, which matches your marginal tax rate.

Higher and Additional Rate Taxpayers

This is where the restriction hits hardest. Consider this example:

  • Rental income: £30,000
  • Other allowable expenses: £8,000
  • Mortgage interest: £12,000
  • Salary income: £60,000

Under the current system:

  • Taxable rental profit: £30,000 - £8,000 = £22,000
  • Total taxable income: £60,000 + £22,000 = £82,000
  • Tax on rental income: £22,000 × 40% = £8,800
  • Mortgage interest tax credit: £12,000 × 20% = £2,400
  • Net tax on property: £8,800 - £2,400 = £6,400

Important Changes Coming in April 2027

From April 2027, the UK tax system introduces separate tax rates for property income. These rates will be 22% for basic rate, 42% for higher rate, and 47% for additional rate taxpayers. However, mortgage interest relief will remain restricted to 20%, creating an even larger gap for higher-rate taxpayers.

This change makes the mortgage interest restriction even more significant for property investors with substantial rental income.

Section 24 and Joint Property Ownership

When properties are owned jointly, mortgage interest relief is typically split according to the ownership proportion. Each owner receives their share of the 20% tax credit based on their portion of the mortgage interest paid.

For married couples or civil partners, there may be opportunities to optimize the ownership split to minimize the overall tax impact, particularly where one partner has lower income than the other.

Record Keeping for Mortgage Interest Claims

To claim mortgage interest tax relief, you need comprehensive records:

  • Annual mortgage statements showing interest paid
  • Loan agreements for any additional property financing
  • Bank statements confirming interest payments
  • Receipts for arrangement fees and professional costs
  • Clear allocation between personal and rental property mortgages

If you have mortgages on both your main residence and rental properties, ensure the interest is properly allocated. Only interest on loans specifically for rental properties qualifies for relief.

Mortgage Interest Relief and Property Companies

One key advantage of holding rental properties through a limited company is that Section 24 restrictions do not apply to companies. Corporate landlords can still deduct mortgage interest as a full business expense against rental income.

This creates a significant tax advantage for company structures, particularly for higher-rate taxpaying landlords with substantial mortgage costs. However, incorporation involves other considerations including corporation tax, dividend tax, and stamp duty costs on property transfers.

Strategies to Manage the Mortgage Interest Restriction

While the Section 24 restriction cannot be avoided for individual landlords, several strategies can help minimize its impact:

Portfolio Restructuring

Consider whether incorporation into a limited company structure makes sense for your circumstances. Companies avoid Section 24 entirely and may offer better overall tax efficiency for higher-rate taxpayers.

Income Smoothing

Where possible, consider timing of rental income and expenses to manage total income levels. This might involve deferring rent increases or accelerating allowable expenses.

Joint Ownership Optimization

For married couples, consider the optimal ownership split to utilize both partners' tax bands effectively.

Making Tax Digital and Mortgage Interest Relief

From April 2026, Making Tax Digital becomes mandatory for landlords with gross rental income over £10,000. This means quarterly reporting of rental income and expenses, including mortgage interest costs.

MTD-compatible software will need to handle the Section 24 calculation correctly, applying the basic rate restriction to financing costs while allowing full deduction of other allowable expenses.

Common Mistakes with Mortgage Interest Relief

Many landlords make errors when claiming mortgage interest relief:

  • Including capital repayments - only interest qualifies for relief
  • Claiming personal mortgage interest - must be solely for rental property
  • Missing arrangement fees - these count as financing costs under Section 24
  • Incorrect apportionment - mixed-use properties need careful allocation
  • Poor record keeping - inadequate documentation for HMRC enquiries

Professional Support for Complex Cases

Mortgage interest relief calculations can become complex, particularly for landlords with:

  • Multiple properties with different mortgage arrangements
  • Mixed personal and rental property financing
  • Joint ownership structures
  • Significant other income sources
  • Properties held in different legal structures

In these situations, professional property accountant support ensures compliance and optimization of your tax position.

The Future of Mortgage Interest Relief

The Section 24 restriction represents a permanent change to the UK tax system for individual landlords. With property income tax rates increasing from April 2027, the gap between mortgage costs and available relief will widen further.

This trend continues to make company structures more attractive for landlords with significant mortgage costs, particularly those paying higher rates of tax on their total income.

Understanding how tax relief on mortgage interest for rented property works is essential for effective property investment planning. While the basic rate restriction significantly reduces relief for higher-rate taxpayers, proper planning and record-keeping ensure you claim all available relief within the current rules.