Mortgage interest: don’t miss out on unused relief!

No straight deduction

Since 2020/21, landlords of residential properties aren’t entitled to a tax deduction for interest and other finance costs used for their rental businesses. Instead, they receive a 20% tax credit. However, this is not the end of the story as it is not simply a case of deducting 20% of the relevant costs. There are a number of restrictions that affect what the actual deduction is each year and calculating this can be far from straightforward. Additionally, there are important considerations when the actual relief is less than the maximum potentially available. The following examples illustrate the basic principles and some of the wrinkles to watch out for.

Tax credit for finance cost

Sangita has been a landlord for several years. She makes a profit each year and has no losses or unused finance costs from earlier years. In 2024/25 her rental income is £20,000 and her tax-deductible expenses, £7,000. She also paid interest on two loans used to purchase and improve her let properties on which she paid interest of £14,000 in 2024/25.

As a higher rate taxpayer she owes tax of £5,200 on her £13,000 net rental profits. She is also entitled to a tax credit for the loan interest equal to the lesser of 20% of:

• the finance costs (interest), i.e. £2,800 (£14,000 x 20%)
• the rental profit, i.e. £2,600 (£13,000 x 20%)
• her adjusted total income (let’s assume her adjusted income is £85,000).

In this example the second calculation applies. Sangita has not used the tax credit in respect of £1,000 of the loan interest. However, this won’t just disappear.

Sangita can carry forward the unused finance costs to the following year and make the same calculation to work out how much tax credit she’s entitled to for that year.

Losses

The position gets trickier when the rental business makes a loss. Let’s assume in 2024/25 Alice began a property letting business. The rental income for the year was £4,800 (the property was vacant for some months between tenants), less expenses of £6,000 and mortgage interest of £7,000.

She can deduct the £6,000 expenses but none of the mortgage interest to arrive at a loss of £1,200. This can be used against later rental profits. The unused interest of £7,000 can also be carried forward as explained earlier.

It’s important to keep a record of losses and unused finance costs separate from each other. These figures are needed for your self-assessment return if you complete one.

In 2024/25 Alice received rent of £11,000. Her expenses are £3,000, plus mortgage interest of £9,500. Alice’s rental income profit is therefore £8,000 but this is then reduced to £6,800 by the £1,200 loss brought forward before the tax credit for interest is worked out. For this example we’ve assumed it is 20% of the rental profit of £6,800. This means Alice can carry forward unused finance cost to the next tax year of £9,700 (£7,000 brought forward plus £2,700 unused for 2024/25 (£9,500 - £6,800)).