Buy-to-let landlords in the UK continue to face pressure from rising mortgage costs and long-standing tax restrictions. One of the most significant issues remains mortgage interest relief, which directly affects how rental profits are taxed. Since full relief was withdrawn, many landlords have seen a reduction in net income and borrowing capacity.
These rules have a direct impact on cash flow, portfolio growth, and compliance. Higher tax liabilities limit reinvestment and increase financial risk. For limited company directors, overseas investors, and accounting professionals, understanding the current treatment of mortgage interest is essential for reliable planning.
This guide covers:
- How mortgage interest relief works in 2026
- Why higher-rate taxpayers are most affected
- When company structures may be more tax-efficient
- Practical ways to reduce tax exposure
What Has Changed in Mortgage Interest Relief for Landlords?
The current rules on mortgage interest relief remain one of the most important tax changes for landlords. Introduced fully in 2020 through the Finance (No. 2) Act 2015, Section 24, they continue to shape property taxation in 2026.
The 20% Tax Credit System
Under Section 24, mortgage interest is no longer deducted from rental income. Instead:
- Landlords pay tax on total rental income
- A basic-rate tax credit of 20% is applied to interest costs
- Relief is capped at the basic income tax rate
This means mortgage interest is no longer treated as a standard expense for individuals, as confirmed in HMRC’s guidance on tax relief for residential landlords.
Impact on Higher-Rate Taxpayers
For landlords in the 40% or 45% brackets, this system significantly reduces effective relief. Under the old system, higher-rate taxpayers could deduct interest at their marginal rate. Now, everyone receives only a 20% credit regardless of their tax band.
With income tax bands frozen until April 2028, more landlords are moving into higher tax brackets, increasing overall tax exposure.
How Mortgage Interest Relief Impacts Small vs Large Landlords
The Section 24 restrictions affect landlords differently depending on portfolio size and income levels.
Small Landlords (1-2 Properties)
Small landlords with modest rental income often remain basic-rate taxpayers. The 20% tax credit system has minimal impact on them.
However, incorporation costs (SDLT, CGT, legal fees) are difficult to justify, and ongoing company administration adds unnecessary expense.
For these landlords, maximising allowable expenses and maintaining accurate records provides better returns than restructuring.
Large Landlords (Multiple Properties)
Landlords with larger portfolios face different challenges. Higher rental income often pushes them into 40% or 45% tax brackets, creating significant loss of relief (20% credit vs 40-45% deduction previously).
Incorporation becomes more cost-effective due to larger tax savings and greater capacity to absorb restructuring costs.
The larger the portfolio and the higher the tax bracket, the more beneficial company ownership becomes for maximising tax relief on mortgage payments.
Tax Implications: Limited Company vs Individual Ownership
The choice between individual and company ownership creates substantially different tax outcomes.
Individual Ownership
Advantages: Simpler administration, no incorporation costs, easier profit extraction, lower mortgage rates
Disadvantages: Restricted to 20% tax credit, income taxed at marginal rates (20%-45%), may push into higher tax brackets
Limited Company Ownership
Advantages: Full mortgage interest deduction, corporation tax at 19%-25%, better for reinvestment and portfolio growth
Disadvantages: Incorporation costs (5% SDLT surcharge, 24% CGT), higher mortgage rates, dividend tax when extracting profits, ongoing compliance obligations
Company ownership makes sense for higher-rate taxpayers with substantial portfolios (ยฃ50,000+ annual rental income) who plan to reinvest profits.
Inheritance Tax Implications for Landlords
Property wealth creates significant IHT exposure requiring long-term planning.
Standard IHT treatment:
- Nil-rate band: ยฃ325,000 per person
- Residence nil-rate band: ยฃ175,000 (main residence to direct descendants)
- Both thresholds frozen until April 2031
- IHT at 40% above these thresholds
- Married couples can combine allowances (up to ยฃ1 million)
Planning strategies:
- Early gifting (transfers 7+ years before death are exempt)
- Trusts to remove assets from estate
- Life insurance in trust to cover IHT liabilities
- Spousal transfers (IHT-exempt)
Company ownership may offer IHT advantages through easier share gifting and flexible succession planning. For comprehensive information, refer to HMRC’s guidance on Inheritance Tax.
How Mortgage Interest Relief Works in Practice?
Understanding the technical rules is only useful when applied to real situations. These examples help clarify how buy to let mortgages tax relief now operates, as detailed in HMRC’s Property Income Manual.
Example: Individual Landlord
Annual figures:
- Rental income: ยฃ30,000
- Mortgage interest: ยฃ10,000
- Other expenses: ยฃ3,000
Calculation:
- Taxable income: ยฃ30,000 โ ยฃ3,000 = ยฃ27,000
- Tax at 40%: ยฃ10,800
- Tax credit: 20% of ยฃ10,000 = ยฃ2,000
- Final tax: ยฃ8,800
Under the old system, tax would have been significantly lower. This demonstrates how the restriction impacts profitability.
Limited Company Comparison
Limited companies are not subject to Section 24 and can treat mortgage interest as a business expense. Corporation tax applies to net income at tiered rates:
- 19% for profits up to ยฃ50,000 (Small Profits Rate)
- 25% for profits above ยฃ250,000 (Main Rate)
- Marginal relief applies between ยฃ50,000-ยฃ250,000
This approach restores traditional mortgage interest tax deduction treatment and can result in substantial savings for higher-rate taxpayers.
Costs and Risks of Incorporation
Transferring properties into a company involves:
- Stamp Duty Land Tax (SDLT): typically, 5% surcharge on residential property
- Capital Gains Tax (CGT): currently 24% for higher-rate taxpayers
- Legal and valuation fees
- Mortgage refinancing costs
Therefore, incorporation suits larger portfolios and higher-rate taxpayers more than small landlords. Professional advice is essential before making this decision.
Practical Ways to Maximise Tax Savings in 2026
Although mortgage interest relief remains restricted, several strategies can improve returns. Understanding how much mortgage interest is deductible and what other expenses qualify is essential for tax planning.
Claim All Allowable Expenses
Ensure full use of deductible costs, including repairs and maintenance, insurance premiums, letting agent fees, professional services, safety certificates, and ground rent. These reduce taxable profit and improve overall returns.
Review Mortgage Products
With changing interest rates, refinancing may reduce interest costs, improve cash flow and reducing exposure to restricted relief. Regular mortgage reviews are essential.
Use the 20% Tax Credit Correctly
Keep detailed interest statements, reconcile lender reports, and check HMRC calculations through Self-Assessment to ensure proper application of the credit.
Furnished Holiday Lettings and Changes
From 6 April 2025 (1 April 2025 for companies), the FHL tax regime was abolished under the Finance Act 2024. These properties now follow standard rental rules:
- Interest relief changed from full deduction to restricted 20% credit
- Capital gains now charged at standard residential rates (24%)
- Business reliefs including pension contributions and capital allowances removed
- Loss relief now follows standard property rules
This represents a significant change for FHL owners who previously benefited from more favorable tax treatment.
Summary Checklist for Landlords
Use this checklist to quickly review whether current mortgage interest claims are correct and up to date. It helps landlords spot gaps, avoid common mistakes, and improve tax planning for 2026.
Conclusion
Mortgage interest relief remains one of the most important factors shaping buy-to-let profitability in 2026. The continued 20% tax credit system, combined with frozen thresholds and higher interest costs, means individual landlords face ongoing pressure on net returns.
Understanding how the system works, when incorporation may help, and how to manage expenses allows landlords to respond strategically and make informed decisions that support sustainable investment. Given the complexity of current tax rules, professional advice is highly recommended.
Frequently Asked Questions
What is mortgage interest relief for landlords?
Mortgage interest relief allows landlords to receive a 20% tax credit on interest costs instead of full deductions. It applies to individual property owners under Section 24.
Can I claim mortgage interest as a tax deduction?
Individual landlords cannot deduct interest fully. They receive a basic-rate tax credit of 20% instead. Only limited companies can deduct mortgage interest as a business expense.
How has tax relief changed in 2026?
The 20% credit system continues under Section 24, and furnished holiday lets now follow standard rental tax rules from 6 April 2025, losing their preferential tax treatment.
Is mortgage interest tax deductible for rental properties?
Only limited companies can fully deduct interest as a business expense before paying corporation tax (19%-25%). Individuals receive a 20% tax credit.
How do I calculate mortgage interest for tax purposes?
Use lender statements to identify annual interest paid and apply the 20% credit through your Self-Assessment tax return as outlined in HMRC’s guidance.
What is the impact of the 20% tax credit system on higher-rate taxpayers?
Higher-rate taxpayers lose significant relief previously deducting at 40-45%, now only receiving 20%, resulting in substantially higher tax bills.
How do I know if incorporating a limited company is beneficial?
Incorporation typically benefits higher-rate taxpayers with ยฃ50,000+ annual rental income who reinvest profits. Calculate total costs against long-term tax savings.
Divyanshi is a subject matter expert in the UK accounting space, creating clear and easy-to-read content for accountants and businesses. She covers topics such as VAT returns, Self-assessment tax, bookkeeping, business planning and Year-end accounts. By understanding the common challenges faced by accountants and business owners, she focuses on writing content that answers real questions and simplifies complex topics. Her approach keeps information clear, relevant and useful for everyday business needs.
