Leveraging any property you own as a rental is considered by many (and more importantly the government) a business endeavor. As such, there are expenses that you incur to operate that business, which is tax deductible. This includes a long list of expenditures and costs, all of which help lower the taxable income of a property owner or landlord to reduce their tax costs at the end of the fiscal year.

Until recently, this included the cost of financing. In other words, you would be able to claim the full cost of the interest on a mortgage against the income made from that property’s rent. The HMRC decided to make changes to this policy, starting in the year 2017 and fully transitioning to a new model in 2020. These changes affect landlords all over the UK. So, what does claiming mortgage interest on rental income look like today?

Claiming Mortgage Interest on Rental Income
Claiming Mortgage Interest on Rental Income

What are the Buy-and Let Rules About Claiming Mortgage Interest on Rental Income?

Anyone that owns a buy-and-let property is allowed to claim mortgage interest on their rental income. However, claiming this interest is done after you pay your taxes on the rental income you have received. How does that work?

Amal from Accountingpreneur said “If you have received £15,000 in rental income, and you are taxed at the 20% rate, you will pay £3,500 in taxes for that rental income.” If you are taxed at 40% it will be £6,000 and if you are at the 45% rate, it will be £6,750. You will then be allowed to claim 20% of the cost of your interest payments for that year. If your interest payments on your mortgage are £12,000, you will qualify for £2,400 in tax relief.


How is that Different from Years Past?

In years past, the entirety of your interest payments could be claimed against your rent, reducing your taxable income. In the same example as above, if you received £15,000 in rental income but paid £12,000 in mortgage interest payments, you would be responsible for paying tax on the remainder of the sum, £3,000. At the 20% rate, that is £600, the 40% rate is £1,200 and the 45% rate is £1,350.

At the same level of income, and with the same amount of interest payments owed, the same property owner will pay, at the 20% rate, £700 more in tax in 2023 as they did in 2017. At the 40% rate, they pay £2,400 more and at the 45% rate, they will pay £3,000 more.


Claiming Mortgage Interest on Rental Income

The good news is that property owners are still eligible for some tax relief when it comes to the interest paid on the mortgages for their rental properties. Leveraging all credits and exemptions in the tax code is key to being able to maximize profits and reduce the burden of taxation. While it may not be as simple or easy as it was prior to 2017 (in relation to the interest on mortgages), there are still many avenues for property owners to reduce their tax costs. Professional guidance is recommended to be able to ensure tax compliance as well as ensuring maximum benefits from the current laws and regulations.



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