Understanding Tax Relief on Interest for Landlords: What You Can and Can’t Claim in 2025
When it comes to claiming tax relief on mortgage interest and finance costs, not all landlords are treated equally. The type of property you let — and whether you operate as a company or as an individual — can significantly impact how much tax relief you’re entitled to.
With significant changes taking effect from 6 April 2025, especially affecting furnished holiday lets (FHLs), it is now more important than ever to understand what interest and finance costs you can deduct and how to do so in a compliant and tax-efficient way.
Property Type and Ownership Structure Matter
Let’s break this down according to property type and how the landlord operates.
1. Residential Properties (Unincorporated Landlords)
If you are an individual landlord letting out residential property, including furnished holiday lets from 6 April 2025, you cannot deduct your mortgage interest directly from your rental profits.
Instead, you are entitled to a basic rate tax reduction, which is limited to the lowest of:
- 20% of the interest and finance costs;
- 20% of the rental profits; or
- 20% of your adjusted net income.
For example, if you paid £5,000 in mortgage interest and had rental profits of £6,000, and your adjusted income is £50,000, you would receive a £1,000 tax credit (20% of the interest).
If your rental business makes a loss, or if the full relief cannot be used in the current year, unrelieved costs can be carried forward and applied in future years.
2. Furnished Holiday Lets (FHLs) – Changes from April 2025
Until 5 April 2025, qualifying FHLs allow full deduction of interest and finance costs when calculating rental profits.
However, from 6 April 2025, FHLs will be taxed the same way as residential properties. This means the interest will no longer be fully deductible, and you will only receive the 20% basic rate tax credit.
Landlords who currently benefit from full relief on FHL income should consider their position carefully and may wish to seek tax advice on options such as incorporation.
3. Residential Properties (Companies)
For landlords operating via a limited company, the rules are more favourable. Interest and finance costs are fully deductible as normal business expenses when calculating corporation tax.
There are no restrictions on interest relief for limited companies, making this a key reason many landlords choose to incorporate.
4. Commercial Properties (All Landlords)
If you are letting out commercial property, the rules are consistent regardless of whether you are an individual or a company.
In both cases, interest and finance costs are fully deductible when calculating taxable profits.
Examples of commercial property include shops, offices, warehouses, and restaurants.
Mixed-Use Properties: Part Residential, Part Commercial
Where a landlord owns and lets out a property that includes both residential and commercial elements — for example, a shop with a flat above — the interest must be apportioned between the two elements.
- For the commercial portion, full deduction is allowed.
- For the residential portion, only the 20% tax credit is available.
The apportionment must be on a just and reasonable basis. This could be done by floor area, rental value, or property value. HMRC does not specify a single method but expects consistency and fairness.
Mixed Portfolios: A Combination of Property Types
Where a landlord owns a combination of residential and commercial properties, the tax treatment of interest and finance costs must follow the respective rules for each property type.
For example:
- Interest on loans related to residential lettings is eligible only for the basic rate reduction.
- Interest on loans related to commercial property is fully deductible.
Where loans are secured across both types of property, care must be taken to apportion interest on a just and reasonable basis. Clear documentation and records are essential.
Key Points to Remember
- Understand which type of property you own and let — residential, commercial, or mixed-use.
- Know how you operate — as an individual landlord or through a company — as this determines how interest is treated for tax purposes.
- Be aware of the changes from April 2025 affecting furnished holiday lets, which may reduce available relief.
- Keep detailed records of interest allocations, especially where mixed-use or mixed-portfolio loans exist.
- Incorporation may be worth exploring if your property business has significant borrowing.
Speak to Merranti Accounting
Interest deductions are a core part of property tax planning. Understanding how to claim them — and how upcoming changes could impact you — can make a material difference to your after-tax profit.
If you’re unsure whether your current structure is the most tax-efficient, or if you’re affected by the upcoming rule changes, now is the time to get advice.
