10 Common Mistakes Landlords Make with Mortgage Interest and Tax Relief

Mortgage interest rates are among the biggest expenses a landlord can have, and one of the most misjudged property tax questions. The rules are now a lot more complex, and the potential of making mistakes can be costly since the phased implementation of Section 24, the cap on finance cost relief. These are the top 10 mistakes that we see from the most seasoned portfolio landlords to the first-time property landlords.

1. Thinking You Can Still Deduct Mortgage Interest as an Expense

This is likely one of the most ingrained landlord tax misunderstandings. Until April 2017, single landlords could deduct mortgage interest directly from their rental income before taxation. That’s no longer true. The Finance (No. 2) Act 2015 introduced new regulations under Section 24 of the Finance Act, which prohibit an individual landlord (including letting through a partnership) from deducting finance costs from property income at all. However, they are given a simple tax deduction equal to 20% of the lower of their finance costs, property profits or adjusted total income. The difference is quite significant, the reduction in income on which tax is paid is much more important than the percentage reduction in the final bill. This change has made leveraged property portfolios far more heavily taxed for higher- and additional-rate taxpayers.

2. Assuming the Restriction Applies to All Landlords

Section 24 applies to individual landlords and partnerships, not companies. One reason incorporation has become a more popular strategy for portfolio landlords is that mortgage interest can still be deducted as a business expense in the normal way. The restriction also does not include furnished holiday lettings, but it should be noted that the furnished holiday lettings regime has been replaced, and the new legislation will take effect from April 2025, meaning that any landlords who relied on this exemption should now review their situation. There is no restriction on commercial property; it applies only to residential property businesses.

3. Miscalculating the Tax Reduction

Landlords who know they receive a tax reduction rather than a tax deduction still underestimate it. The reduction in tax is 20% of the lowest of three amounts: The finance costs for that year, the profit of the property business, or the adjusted total income earned by the individual, over the personal allowance. In some cases, the total finance costs will not provide any tax relief in the year of the loss if the landlord is making a business loss or the total income is low. Finance costs may be offset against income, and any unused portion may be carried forward to future years; often, however, they are not offset against income, leading landlords to pay more tax than they need to.

4. Forgetting to Carry Forward Unused Finance Costs

Following on from the above, many landlords simply do not know that unused finance costs, where the tax reduction could not be fully utilised in a given year, can be carried forward and used in a subsequent tax year. This is particularly relevant for landlords who made losses in earlier years or whose income fluctuated. The carry-forward amount should be tracked carefully each year and included in the self-assessment return. Failing to do so means leaving money on the table, and HMRC will not automatically apply it for you.

5. Including Capital Repayments as a Finance Cost

This is a straightforward but surprisingly common error. Only the interest element of a mortgage payment qualifies for the tax reduction — the capital repayment portion is simply a reduction in the outstanding loan balance and has no tax relevance whatsoever. Landlords on repayment mortgages need to obtain a breakdown from their lender each year showing the split between interest and capital, and only the interest figure should be included in the tax calculation. Using the total monthly payment figure will overstate the finance costs and, if it results in an incorrect tax return, could expose the landlord to penalties.

6. Claiming Relief on Borrowing Not Used for the Property Business

The finance costs that qualify for the tax reduction must relate to borrowing used for the property rental business. This means the loan must have been taken out to purchase, improve, or repair a rental property.

7. Overlooking the Impact on Personal Allowance and Tax Credits

The negative and under-publicised impact of Section 24 is on adjusted net income. The net cash position of a landlord may not change, but the taxable income may increase, since a landlord’s costs are no longer deducted from rental income. This higher income amount may push landlords into the personal allowance, where the rate at which it is reduced reaches 60% on the marginal rate of income earned in that bracket. It might also impact child benefit (via the High Income Child Benefit Charge), tax credits, and student loan repayments. Landlords close to these thresholds should be very careful to model the total effect, rather than just the tax on rental income.

8. Failing to Restructure Before the Problem Becomes Acute

Many landlords know they may benefit from incorporation, but are unsure how to act or have concerns about capital gains tax (CGT) on transfer and stamp duty land tax (SDLT). There are certainly valid concerns, and the analysis is in reality complex; the trouble is not modelling the numbers appropriately, but rather not making an educated decision. For other landlords, the constant Section 24 tax burden will offset the up-front cost of incorporation over a relatively short time. It will not be for others. The idea here is not to wait till the end to analyse it. The longer you wait, the more restricted and costly the choices will be.

9. Treating All Finance Costs the Same

Not all borrowing costs are treated identically. While mortgage interest is the most common finance cost, the rules also cover other costs such as arrangement fees, loan fees, and interest on loans used to fund deposits or improvements. However, the treatment of these costs can vary depending on their nature and the manner of their incurrence.

10. Not Keeping Adequate Records

Last but not least, and most importantly, some landlords fail to maintain proper records of the claims for finance costs. In a normal self-assessment, HMRC has up to 6 years from the filing deadline to investigate a return in cases of careless behaviour. To establish a finance cost relief claim, a landlord must prove the purpose of the initial loan, the amount of interest paid in each tax year, any remortgaging, any use of funds released, and any unused finance costs carried forward. Mortgage statements, completion statements, and a clear, well-documented record of how the loan proceeds were used are all important. If not, a landlord could easily end up unable to prove a legitimate claim.
Final Thoughts

The mortgage interest rules for landlords have become genuinely complex since the introduction of Section 24, and the consequences of misunderstanding them extend well beyond simply paying the wrong amount of tax. Getting the analysis right requires an understanding of how finance costs interact with total income, the personal allowance, and other reliefs and charges. If your rental portfolio has grown, your income has changed, or you have remortgaged in recent years, it is worth reviewing your position carefully to make sure you are neither overpaying nor inadvertently underclaiming.

This article is for general information purposes. UK Landlord Tax provides specialist tax advice for landlords across the UK. For tailored advice on your specific circumstances, get in touch with our team.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG