Relief for mortgage interest on let properties

Newsletter issue â€“ March 2023

As an individual landlord you canâ€˜t deduct finance costs, including interest, from your residential property rents for tax purposes. Instead, you get tax relief for those costs as a basic rate tax credit calculated as 20% of the lower of:

finance costs for the year plus any unused finance charges brought forward;
your property income profits with no deduction for finance costs, - or your adjusted total income for the year that exceeds your Personal Allowance.

In years where the property income is low, or a loss, little or no tax credit can be set-off, in which case the excess interest which is not relieved is carried forward to the next tax year.

Example

In 2021/22 Bob the Builder had trading profits of Â£13,500. It was his first year in which he let out a property and he received rents of Â£3,000, paid mortgage interest of Â£4,000 and incurred Â£6,500 of allowable expenses.

Bob made a loss of Â£3,500 (Â£3000 â€“ 6500) on his property which canâ€˜t be set against his trading profits. As Bob has zero property profits for the year, he canâ€˜t set off a tax credit derived from his finance costs against his 2021/22 tax liability.

However, both his property loss of Â£3500 and the unused finance costs (Â£4000) are carried forward to the next tax year.

In 2022/23 Bob has a better year. He received rental income of Â£18,000, paid property expenses of Â£1500 and Â£6000 as interest. The loss from 2021/22 of Â£3500 is set against his rental income. His trading profits have also improved to Â£26,000.

The amount of tax credit is calculated as 20% of the lower of: