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Mortgage interest tax relief

  • 2 min read

The mortgage interest tax relief is a tax credit that landlords can claim to reduce their tax bill. 

Once upon a time, private landlords could simply deduct any interest paid on their mortgage from their rental income when filing their tax return. But that was scrapped and replaced with a new mortgage interest tax relief system. 🫣

How does the mortgage interest tax relief work?

Landlords are taxed on their total annual income and can only claim tax relief at the basic rate of 20% on whichever figure is lower:

  • Finance costs (so any mortgage interest payments, loan repayments, overdrafts, etc)
  • Profit from their rental income (minus allowable expenses)
  • Total income (above the personal allowance)

Here’s an example👇

Let’s say you receive £950 per month from renting your property. That’s £11,400 a year.

You also make regular mortgage interest payments of £600 per month on that property, which is £7,200 per year.

You’ll get a tax credit of £1,440 (because £7,200 x 20%). 

If you’re a basic-rate taxpayer (pays 20% tax), this means you’ll pay £840 in interest, but if you’re a higher-rate taxpayer (pays 40% tax), you’ll pay £3,120.

Want to check how much mortgage interest tax relief you can get? Use our rental income tax calculator!

What changes were made to the mortgage interest tax relief?

Before 2017, the interest that landlords paid on their mortgage was 100% tax deductible.

It’s fairly common for landlords to have interest-only mortgages, where you pay only the interest each month and the price of the property at the end of the period. So this meant that you could pretty much claim relief on all of your mortgage repayments. 

You can only imagine how tax-efficient this was… until the government put a stop to it. The changes were gradually rolled out between 2017 and 2020. 

To wrap up, the tax credit works out as a much smaller relief than what was in place before. But hey, something is better than nothing, right? 😅

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