Landlords and mortgage interest: why your tax bill is bigger than your profit suggests
Individual landlords cannot deduct mortgage interest from rent. They get a 20% tax credit instead. How it works, and what it means for higher-rate landlords from April 2027.
Since April 2020, landlords who own residential property personally cannot deduct mortgage interest and other finance costs when working out their rental profit. Instead, they get a tax reduction worth 20% of the lower of their finance costs, their property profits or their adjusted total income.
Tax of £6,000 on a real profit of £10,000: an effective rate of 60%. In 2026/27, property income is taxed at the main rates.
Show the data
| Real profit after interest | £10,000 |
|---|---|
| Profit taxed | £20,000 |
| Tax at 40%, less £2,000 credit | £6,000 |
What changes in 2027
From 6 April 2027, property income has its own rates of 24%, 44% and 49% in England, Wales and Northern Ireland. For the landlord above, tax on the £20,000 profit would rise from £8,000 to £8,800 before the finance cost credit.
Smaller lets
If your rental income is small, the £1,000 property allowance can make it tax-free without claiming expenses. Letting a furnished room in your own home can bring in £7,500 a year tax-free under Rent a Room, or £3,750 each if the income is shared.
Options worth looking at
- Whether a lower-earning spouse should own more of the property.
- Paying down the most expensive borrowing first.
- For a growing portfolio, whether new purchases belong in a company.
Sources
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This insight is general information, not advice for your circumstances. Talk to us before acting on it.