Individual landlords of residential property cannot deduct mortgage interest and other finance costs from rental income. Instead they get a tax reduction worth 20% (the basic rate) of the lowest of their finance costs, their property profits or their adjusted total income above the personal allowance. HMRC says the change took full effect over the years 2017/18 to 2020/21.
Step by step
- Work out property profitRent less allowable expenses, without deducting finance costs.
- Tax the profitAt your usual income tax rate.
- Find the lowest of threeFinance costs, property profits, or adjusted total income above the personal allowance.
- Take off 20%Reduce the tax by 20% of that lowest amount. Unused finance costs can be carried forward.
Worked example. A higher-rate landlord has £9,484.62 of rental profit before finance costs and £7,500 of mortgage interest. Tax at 40% is £3,793.85. The reduction is 20% of £7,500 = £1,500, so tax is £2,293.85. If interest were fully deductible, the tax would have been £793.85.
Who it applies to
The restriction applies to finance costs on residential lettings. HMRC’s manual says loans wholly for commercial properties are not affected.
Frequently asked questions
Can I deduct mortgage interest from rental income?
Not as an individual residential landlord. You get a 20% tax reduction on finance costs instead.
What if my finance costs are more than my profit?
HMRC says the finance costs not used for the tax reduction are carried forward to later years.
Sources
- Changes to tax relief for residential landlords – GOV.UK
- PIM2054: residential property finance costs – HMRC
Related guides
- LandlordsMaking Tax Digital for landlords: quarterly update deadlines for 2026/27
- LandlordsHow to increase the rent: section 13 and Form 4A
- LandlordsLandlord gas safety certificates: the rules and deadlines
- LandlordsEICR for landlords: electrical safety checks in England
This guide is general information, not legal or tax advice. Last checked 4 November 2026. Rules change; check the sources above.