What is the mortgage interest restriction for landlords?

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# Mortgage Interest Restriction for Landlords

## What the law says

The mortgage interest restriction for individual landlords is found in **section 272A of ITTOIA 2005** (inserted by Finance Act 2016, s.24). The rules were phased in as follows:

- **2017-18**: only **75%** of finance costs on dwelling-related loans were deductible
- **2018-19**: only **50%** deductible
- **2019-20**: only **25%** deductible
- **2020-21 onwards**: **no deduction at all** is allowed for costs of a dwelling-related loan in calculating property business profits

> ⚠️ The restriction does **not** apply to companies charged to income tax on property profits.

**What is a "dwelling-related loan"?** Under **s.272B ITTOIA 2005**, it means so much of an amount borrowed for purposes of a property business as is referable (on a just and reasonable apportionment) to the part of the business carried on for the purpose of generating income from land consisting of a dwelling-house or part of a dwelling-house.

**"Costs"** of a dwelling-related loan include:
- interest on the loan;
- any amount economically equivalent to interest; and
- incidental costs of obtaining finance

**Furnished holiday lettings are excluded** — a loan is not a dwelling-related loan to the extent it is referable to the commercial letting of furnished holiday accommodation.

**Tax credit in place of deduction**: Under **s.274A ITTOIA 2005**, individuals are entitled to a tax reduction (credit) at the **basic rate of income tax** on the "relievable amount" (i.e. the finance costs that can no longer be deducted). This relief is given at Step 6 of the income tax calculation under s.23 ITA 2007.

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## HMRC guidance / practice

**Scope**: The restriction applies only to the **residential (dwelling-house) part** of a property business. Finance costs on loans for non-residential lettings remain fully deductible. Where a business mixes residential and commercial lettings, only the interest referable to the residential part is restricted.

**Apportionment**: Where a single loan covers both residential and non-residential property, the interest must be apportioned on a **"just and reasonable basis"**. HMRC does not prescribe a single method but gives examples of acceptable approaches:

- **By relative property values** (e.g. if a flat represents 75% of the combined value of a mixed-use building, 75% of the interest is restricted)
- **By floor area** (e.g. if the residential part is 40% of total floor area, 40% of interest is restricted)
- **By proportion of loan expenditure** (e.g. if 87.5% of a loan was spent on a flat conversion, 87.5% of interest is restricted)

**Cash basis landlords**: Under the cash basis, there is an **additional** restriction where total loans exceed the market value of the properties in the business. The deductible amount is further reduced by the ratio of property value to total loan, before the general s.272A restriction is then also applied.

**Residential mobile home parks**: The restriction does **not** generally apply to residential mobile home parks, as they are treated as a trade rather than a property business.

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### Summary in plain terms

From **6 April 2020**, individual landlords letting residential property **cannot deduct any mortgage interest** (or other finance costs) from their rental income when calculating taxable profits. Instead, they receive a **20% tax credit** on those finance costs. This means higher and additional rate taxpayers no longer get relief at their marginal rate — they only get relief at 20%, regardless of their actual tax rate.

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