Mortgage interest and tax relief

Mortgage interest relief is one of those areas of UK tax that catches many people out. Whether you’re a landlord, a business owner with a property loan, or someone paying interest on a buy-to-let mortgage, understanding how HMRC treats this expense could save you a significant amount at self-assessment time. Let’s walk through the current rules and help you get clarity on what you can and cannot claim.

Who can claim mortgage interest relief?

The short answer: it depends on why you borrowed the money. HMRC is strict about this distinction, and the rules differ considerably between personal and business use.

If you’re a residential landlord, you can claim mortgage interest on properties you rent out. Since April 2020, however, the relief has changed dramatically. Instead of deducting mortgage interest directly from your rental income (which was the case before), higher-rate taxpayers must now claim relief as a basic-rate tax credit. This means you’ll pay tax on your full rental income, but then receive a 20% credit on the interest paid. For the 2024/25 tax year, this applies to anyone earning over £50,270 (the higher-rate threshold). If you’re a basic-rate taxpayer, you can still claim mortgage interest as a direct deduction.

If you’re a business owner and have taken out a loan to buy premises for your business, you can claim the interest as a business expense. This applies whether you’re a sole trader or running a limited company. The interest is deductible in full against your profits.

Residential mortgages on your own home? You cannot claim mortgage interest relief on your primary residence, regardless of your circumstances. This is a common misconception, so it’s worth clarifying straight away.

The landlord relief change: what you need to know

The shift to basic-rate relief only has created a two-tier system that’s worth understanding properly. Imagine you’re a higher-rate taxpayer with £10,000 in mortgage interest on a buy-to-let property. Under the old rules, you’d have deducted that £10,000 directly from rental income. Now, you’ll declare it as part of your taxable profit, and HMRC will allow you a 20% credit—that’s £2,000 relief on your tax bill.

For additional-rate taxpayers (those earning over £125,140 in 2024/25), the position is even tighter: you only get basic-rate relief too.

Basic-rate taxpayers haven’t lost out here; you still claim the full amount as a deduction. This change was intended to level the playing field, though it’s been controversial in the property sector.

Keep meticulous records of all mortgage interest paid. Your lender should provide an annual statement, and you’ll need this for your Self Assessment return. The figures must be accurate, as HMRC cross-references these details.

Business loans and property interest

If you’ve borrowed money to invest in your business premises, the rules are more straightforward. Interest on loans used to purchase commercial property, business equipment, or other business assets is fully deductible against trading profits. There’s no basic-rate restriction here.

The key test is simple: was the borrowed money used for business purposes? If yes, the interest is deductible in full. Document the loan purpose clearly, especially if HMRC ever asks questions.

If you’re a director of a limited company, note that interest on a director’s loan is treated differently. Interest paid on a loan from the company to a director is not deductible as a business expense—in fact, it can trigger tax charges on the director themselves. Conversely, if you as a director lend money to the company, interest you receive may be taxable income (unless it qualifies under specific exemptions).

Getting your Self Assessment right

When completing your tax return, use the correct boxes for mortgage interest:

• Landlords: declare rental income on the Property Income pages, and either claim relief as a deduction (basic-rate) or record it separately for credit relief (higher-rate).
• Self-employed: enter business interest as an allowable expense in your trading accounts.
• Limited company: include it in your corporation tax return under finance costs.

Errors here are surprisingly common, and HMRC takes particular interest in property income claims. If your return is selected for enquiry, mortgage interest is often one of the first areas scrutinised.

Conclusion

Mortgage interest relief rules in the UK are increasingly complex, especially for landlords. The key is knowing whether you qualify, which rate of relief applies, and whether you’ve got the paperwork to back up your claim. Get it right, and you’ll reduce your tax bill fairly. Get it wrong, and you risk penalties or interest charges.

For tailored advice, contact Severn Accounting — we’re here to help.