A rental property can look comfortably profitable on paper until the tax calculation lands. Mortgage interest tax relief landlords receive is no longer a straightforward deduction from rental income for most individual owners. That distinction matters because it can increase the income shown on your tax return, move you into a higher tax band and leave less cash after tax than the headline rent suggests.
For landlords with borrowing, this is not a small technical adjustment to leave until January. It should shape decisions about rent, refinancing, ownership structure and whether a property still earns its place in your portfolio.
How mortgage interest tax relief for landlords works
Since the introduction of the residential finance cost restriction, usually referred to as Section 24, individual landlords cannot deduct mortgage interest and other qualifying finance costs from residential rental income before calculating taxable profit.
Instead, you calculate your property profit without those finance costs. You then receive a tax reduction equal to 20% of eligible finance costs, subject to statutory limits. In practical terms, relief is given at the basic rate of income tax, even if you pay tax at 40% or 45%.
This approach applies to most UK residential property businesses run by individuals, including jointly owned properties and many partnerships. It also applies to certain trusts. It does not generally apply to property held in a limited company, or to commercial property income.
The change was phased in and has applied in full since the 2020-21 tax year. Yet it still catches landlords out, particularly where mortgage rates have risen sharply or a portfolio has expanded without a matching review of tax exposure.
Which costs count as finance costs?
Qualifying finance costs usually include interest on loans used to buy, improve or repair a residential let property. They can also include interest on a loan secured against another asset where the money was genuinely used for the rental business, along with certain fees and costs of obtaining finance.
The purpose of the borrowing matters more than the security. A remortgage needs particular care: interest may qualify to the extent borrowing relates to the property business, but extracting money for private spending does not turn that additional borrowing into a deductible business cost.
Capital repayments are never finance costs for this purpose. Nor are routine repair bills, insurance, letting agent fees or service charges. Those may still be allowable expenses, but they are deducted in the normal way when calculating rental profit.
Why the cash-flow gap can be painful
Consider a higher-rate taxpayer receiving £80,000 in annual rent. Assume they have £20,000 of ordinary allowable property expenses and £25,000 of mortgage interest.
Their taxable property profit is £60,000 - rent less ordinary expenses - rather than £35,000. Ignoring personal allowances and other income for simplicity, tax at 40% is £24,000. The 20% finance-cost reduction is £5,000, leaving £19,000 of tax.
Before the restriction, the same landlord would have been taxed on £35,000 of profit, producing tax of £14,000 at 40%. The underlying cash position has not changed: £80,000 less £20,000 of costs and £25,000 of interest leaves £35,000 before tax. But the tax bill is £5,000 higher.
That is why gross rent is a poor measure of affordability. A landlord can have an apparently healthy profit for tax purposes while the actual surplus after interest, tax and capital repayments is thin.
The result depends on your wider income. A basic-rate taxpayer may see little or no direct difference from the old calculation. A higher-rate taxpayer with substantial interest costs is more likely to feel it. The effect can also be greater where the inflated income figure reduces a personal allowance or affects other income-based thresholds, such as the High Income Child Benefit Charge.
The tax reduction is capped
The calculation is not simply 20% of every pound of interest in every circumstance. The tax reduction is limited by rules that broadly compare your finance costs with the property profit and your adjusted total income.
Where the immediate reduction is restricted, unused finance costs may be carried forward for use in a later tax year, subject to the rules. This is helpful, but it does not solve a current cash-flow shortfall. A carried-forward tax reduction is not money in the bank when a mortgage payment is due this month.
Loss-making portfolios need careful handling too. You should not assume that a rental loss automatically shelters salary, pension income or profits from another business. Property losses and finance-cost relief have their own rules, and the correct treatment depends on the figures and source of income.
Joint owners need the right records
For most married couples and civil partners who own a property jointly, rental income is normally taxed 50:50, regardless of who pays the mortgage or receives the rent. Different tax treatment may be possible where beneficial ownership is genuinely unequal and the required declaration is made to HMRC.
This is not a paper exercise to be arranged after seeing the tax result. The underlying ownership must support the split, and the legal, mortgage and practical implications should be considered before changing it. For unmarried joint owners, tax generally follows beneficial ownership, but clear documentation remains essential.
Keep annual mortgage statements, completion documents, loan agreements and records explaining how refinance proceeds were used. These records are especially valuable years later, when a lender has changed, a property has been refinanced several times or ownership has altered.
Does a limited company avoid Section 24?
A company can normally deduct qualifying mortgage interest as a business expense when calculating its taxable profit for corporation tax. This is one reason incorporation is often raised by landlords affected by Section 24.
But a company is not an automatic answer. Moving existing properties into a company can trigger capital gains tax and Stamp Duty Land Tax, and refinancing may be more expensive or unavailable on the same terms. Profits can also face a second layer of tax when extracted personally through dividends or salary. Administration, accounts and company compliance add to the ongoing cost.
For a landlord planning to retain profits for future purchases, incorporation may be worth modelling. For someone with one established property who relies on the income personally, it may not be. The right decision comes from comparing the tax, borrowing, ownership and cash-flow position over several years, not from a single corporation tax rate.
Recent changes for former holiday lets
The furnished holiday lettings regime was abolished from 6 April 2025 for individuals and 1 April 2025 for companies. For individual owners whose properties previously qualified, income is now generally treated under the standard property income rules.
That means the mortgage interest restriction can now be relevant where it was not previously. Holiday-let owners should revisit forecasts rather than relying on last year's tax position, especially if they have seasonal income and high borrowing costs.
Turn the calculation into a property decision
A useful annual review starts with each property, not just the portfolio total. Set out realistic rent, voids, management costs, repairs, interest, capital repayments and tax. Then test what happens if the fixed rate ends, rent is held flat or a major repair arrives.
This gives you a clearer answer to the question that matters: after tax, is this property producing enough cash and return for the risk and effort involved? It may be sensible to increase rent where the market supports it, reduce debt, sell a weak performer, alter future purchase plans or simply keep better reserves. None is universally right, but all are stronger decisions when based on the real tax position.
Good landlord tax advice should do more than put a number in the property pages of a return. It should show you what that number means before you refinance, buy, sell or commit to another year of tight cash flow.