Mortgage interest restriction

The mortgage interest restriction is a restriction on the tax relief that landlords can claim for their finance costs.

What is the mortgage interest restriction?

The mortgage interest restriction was announced in Summer Budget 2015 but it gradually came into effect from the 6th April 2017 onwards. Basically, it restricted tax relief for finance costs on residential properties to the basic rate of Income Tax. Finance costs that were affected include:

• Mortgage interest
• Interest on loans to buy furnishings
• Fees incurred when taking out or repaying loans and mortgages

Since the measure was introduced in 2017, no tax relief is available for capital repayments of a mortgage or loan.

Why was it introduced?

In short, until the 2016/2017 tax year, you could claim all of the mortgage interest against your rental income tax. If you had an interest-only buy-to-let mortgage, this was obviously a great benefit! The mortgage interest restriction was introduced to make the system fairer, ensuring that landlords with higher incomes no longer received the most generous tax treatment.

Since then, it was gradually replaced with a 20% tax credit. From 6th April 2020, the tax credit became the only available relief. In other words, claiming mortgage interest is restricted to the basic rate of tax (20%).

Who’s affected by this measure?

The mortgage interest restriction only affects you if you’re a higher rate taxpayer because you used to be able to get back 40% or more of your mortgage interest. If you have many properties, it might be worthwhile to run your rental business through a limited company, since you can still claim the interest in the old way.

If you’re a basic rate taxpayer, nothing has changed – you were already getting back 20% of the mortgage interest!