Mortgage interest on rented property

Under new rules that came into effect from April 2017 the tax relief on mortgage costs for residential landlords was restricted to the basic rate of tax. The finance costs restriction was phased in over a number of years and is now fully in place since 6 April 2020. This means that all finance costs, such as mortgage interest on rented properties, are disallowed as expenses and any tax relief is restricted to the basic rate of tax (20%) tax reduction.

The definition of finance costs include interest on mortgages, loans – including loans to buy furnishings and overdrafts as well as alternative finance returns, mortgage fees and other costs and discounts, premiums and disguised interest. No relief is available for capital repayments of a mortgage or loan.

These changes have affected many higher rate and additional rate taxpayers and particularly those with highly leveraged properties, i.e., loans form a significant part of property values. The rules also mean that relevant taxpayers are pushed into paying higher tax rates than previously was the case. This could mean losing some or all of their personal allowances as well as restricting the amount of tax relief on money invested in their pension.

The finance cost restrictions apply if you are a UK resident individual that lets residential properties in the UK or overseas, a non-UK resident individual that lets residential properties in the UK or if you are involved with a partnership that lets properties or are a trustee or beneficiary of a trust liable for Income Tax on the property profits.

Interestingly, landlords of furnished holiday lettings are not affected by the restriction on finance costs.