The current rules
Individual landlords cannot deduct mortgage interest from rental income. Instead, the interest qualifies for a 20% tax reducer applied to the lower of:
- Finance costs not already deducted
- Rental profits
- Adjusted total income (above the personal allowance)
Why it matters
A higher-rate taxpayer's effective tax on geared rental income can exceed 50% — even when "real" profits after interest are modest.
Worked example — higher-rate landlord
- Rent: £30,000
- Mortgage interest: £15,000
- Other expenses: £5,000
Step 1 — Taxable profit: £30,000 − £5,000 = £25,000 Step 2 — Tax at 40%: £10,000 Step 3 — Tax reducer: 20% × £15,000 = £3,000 Step 4 — Net tax: £7,000
Versus pre-2017 rules: profit £10,000 × 40% = £4,000. £3,000 more tax on the same property.
Cap & carry-forward
If the reducer is restricted (because profits are too low), the unused finance costs carry forward to future tax years.
Limited companies — different rules
Companies still deduct interest in full and pay corporation tax (19–25%) on the net profit. This is why portfolio landlords increasingly incorporate.
Planning options
- Transfer ownership to a spouse on a lower tax band (free of CGT/SDLT on the equity portion)
- Incorporate — model SDLT, CGT and refinancing costs carefully
- Pay down the mortgage if you have spare capital
- Switch to commercial property (interest fully deductible)
Always model the whole picture — incorporation isn't always the right answer. Book a planning session.