Mortgage Interest Relief for Landlords | 2026 Guide

The Old System vs The New System

How the New System Works

Step 1: Calculate Your Rental Profit

Calculate your rental profit as normal, but do not deduct mortgage interest.

• Rental income: £25,000
• Allowable expenses (excluding mortgage interest): £5,000
• Rental profit (before mortgage interest): £20,000

For a full breakdown of allowable expenses, see our guide: Allowable Expenses for Landlords.

Step 2: Calculate Your Tax on the Rental Profit

Your £20,000 profit is added to your other income and taxed at your marginal rate.

• Suppose you are a basic rate taxpayer: £20,000 × 20% = £4,000 tax.

Step 3: Calculate the Tax Credit

You get a tax credit of 20% of your finance costs.

• Mortgage interest paid: £8,000
• Tax credit: £8,000 × 20% = £1,600

Step 4: Deduct the Tax Credit

• Tax on rental profit: £4,000
• Tax credit: £1,600
• Net tax due: £2,400

Who Does This Affect?

• Basic Rate Taxpayers: You still get full relief, but it’s now through a tax credit rather than a deduction. The net effect is the same.
• Higher Rate Taxpayers: You only get relief at 20%. The remaining 20% (if you’re a higher rate taxpayer) is not relieved.
• Additional Rate Taxpayers: You only get relief at 20%. The remaining 25% (if you’re an additional rate taxpayer) is not relieved.

What Finance Costs Qualify?

You can claim relief on:

• Mortgage interest: The interest on the loan used to purchase the property.
• Loan arrangement fees: Fees to arrange the mortgage.
• Overdraft interest: If you have an overdraft on a bank account used for the rental business.
• Interest on any other loan: If the loan is used to buy or improve the property.

What Doesn’t Qualify?

• Capital repayments: You cannot claim relief on the capital part of your mortgage repayments.
• Personal loans: If you use a personal loan for a deposit, the interest is not qualifying.

How to Claim Mortgage Interest Relief

You claim the relief on your Self Assessment tax return. For a full guide on filing, see our Landlord Tax Return Guide.

1. Complete the Property Section: In the ‘UK Property’ section of your tax return, you will enter your rental income and expenses.
2. Enter Finance Costs: There is a specific section to enter your finance costs (mortgage interest, arrangement fees, etc.).
3. Calculate the Tax Credit: The tax return will automatically calculate the 20% tax credit for you.

Example Scenarios

Scenario 1: Basic Rate Taxpayer

• Rental income: £20,000
• Mortgage interest: £10,000
• Other allowable expenses: £2,000

Rental profit (before interest): £18,000
Tax at 20%: £3,600
Tax credit (20% of £10,000): £2,000
Net tax: £1,600

Scenario 2: Higher Rate Taxpayer

• Rental income: £30,000
• Mortgage interest: £12,000
• Other allowable expenses: £3,000

Rental profit (before interest): £27,000
Tax at 40%: £10,800
Tax credit (20% of £12,000): £2,400
Net tax: £8,400

If the old rules applied, the net tax would have been lower.

Can You Avoid the New Rules?

There are some ways to mitigate the impact:

1. Increase the Capital Portion: Pay off the mortgage to reduce interest costs.
2. Review the Property Structure: Consider holding property through a limited company. This can be more tax-efficient for higher-rate taxpayers, but comes with other costs and considerations.
3. Transfer Property: Transferring property to your spouse/civil partner to use their Personal Allowance can reduce the tax bill. See our guide: Joint Property Ownership.

How We Can Help

The new mortgage interest relief rules are complex. Our ACCA-qualified accountants can:

• Calculate your tax credit accurately.
• Advise on tax-efficient property structures.
• Help you plan for your tax liabilities.
• Prepare and file your tax return.

This guide is intended for informational purposes and is based on UK tax regulations as of June 2026. Tax laws and government systems are subject to change. Always consult with a qualified professional regarding your specific financial situation. Right Tax Returns is an ACCA-registered firm.