The short version: The mortgage interest restriction limits how much tax relief landlords can claim on their finance costs. It was phased in from 2017 and is now fully in place.
What changed?
Before, landlords could deduct mortgage interest from rental income like any other expense. A higher rate taxpayer with £10,000 of mortgage interest saved £4,000 in tax. Now everyone gets a flat 20% tax credit instead, so the same landlord only saves £2,000.
What costs are affected?
Mortgage interest on residential lettings, interest on loans to buy furnishings, and fees for arranging finance. It doesn’t affect commercial property, only residential lets.
Who’s hit hardest?
Higher and additional rate taxpayers with large mortgages on their rental properties. Some landlords found the changes pushed them into higher tax bands because their full rental income now counts as taxable before the credit is applied.
Can you work around it?
Some landlords have moved properties into limited companies, which aren’t affected by the restriction. But there are costs and complications to transferring property, including potential Capital Gains Tax. It’s not right for everyone.
Want to understand how the restriction affects your buy to let? Let’s look at your numbers together.
