How has buy-to-let mortgage tax changed?
The way in which landlords paid tax on mortgage interest changed in April of 2020, after a four-year phasing out programme.
Before the plan was introduced in 2017, landlords were able to deduct financial expenses from all their rental income. This included mortgage interest payments.
Since April 2020, landlords with buy-to-let mortgages have been unable to deduct mortgage interest from rental income to lower their tax bill at the end of the year. Instead, they now have to pay full tax on any money earned this way.
What is the buy-to-let mortgage tax relief?
Alongside these changes, HMRC also introduced the buy-to-let tax relief. This system means everyone paying a buy-to-let mortgage benefits from a 20% tax credit, based on the amount of mortgage interest paid, no matter what financial tax bracket they're in.
Since the change, landlords who had been able to claim mortgage interest on their rental income at a higher rate of tax are now unable to. Someone in a higher tax bracket might have claimed a 40% or 45% reduction on these costs under the old system, but are now only able to claim 20% back under the new guidelines.
2025-26 buy-to-let mortgage tax relief example
One of the easiest ways to understand what the tax relief means for a landlord is to use a practical example with the tax brackets for the 2025-26 financial year. These are:
Up to £12,570 – 0% (Personal allowance)
From £12,571 to £50,270 – 20% (Basic tax rate)
From £52,271 to £125,140 – 40% (Higher tax rate)
Above £125,140 – 45% (Additional tax rate)
Let’s look at a hypothetical scenario. If a landlord charges £1,000 a month for rent, and makes mortgage interest payments of £600 a month, the net result for rental income tax would be as follows for each bracket:
Tax bracket | Rental income | Tax on income | Mortgage interest payment | Tax relief (20%) | Final tax bill |
|---|---|---|---|---|---|
20% | £12,000 | £2,400 | £7,200 | £1,440 | £960 |
40% | £12,000 | £4,800 | £7,200 | £1,440 | £3,360 |
45% | £12,000 | £5,400 | £7,200 | £1,440 | £3,960 |
Under the old system those in the 40% and 45% brackets would have paid less tax. That’s because they could have included their mortgage interest payments before paying tax under their own personal tax allowance.
What does the buy-to-let tax relief mean for landlords?
The change from the old system to buy-to-let tax relief had two important impacts on landlords, depending on how much your income was to begin with:
Landlords in a higher tax bracket can claim less back as part of their financial expenses on tax returns.
For a handful of landlords on the edge of a bracket, not being able to deduct mortgage interest from their rental income has meant they’re sometimes bumped into a higher tax threshold.
It can be easy to overlook, but the tax relief itself also means all landlords with buy-to-let mortgages are guaranteed to get 20% of their mortgage interest payments back every year. Without the relief, landlords would be unable to claim any expenses or credits on their interest payments.
Who is and isn’t eligible for buy-to-let mortgage tax relief?
These rules and tax reliefs don’t apply to every landlord. Those who find themselves in the following categories are unaffected:
Companies that own properties
Land and property dealing or development businesses
Commercial lettings
Furnished holiday lets
The rules are only aimed at individuals who own residential rental properties.
How does a landlord claim the buy-to-let mortgage tax relief?
The process is simple: go to box 44 on a self-assessment tax return and enter the amount you've paid in interest on your buy-to-let mortgage.
The tax relief will be calculated after you submit your form.
What other buy-to-let taxes do landlords have to pay?
Landlords with buy-to-let mortgages don’t only pay tax on their rental income. There are a handful of other areas where an owner can expect to pay taxes on their buy-to-let property. Some of the most important are:
Stamp Duty Land Tax: you'll pay a 5% surcharge on the standard home-mover rates of stamp duty if you buy a buy-to-let property in England or Northern Ireland. It's different in Scotland and Wales.
Inheritance tax. It’s possible to pay inheritance tax on a buy-to-let property if it passes into your hands from a loved one. Here’s how much you can expect to pay:
For individuals – Nothing for the first £325,000, then 40% of everything above that
For married couples or civil partners – Nothing for the first £650,000, then 40% of everything above that
If a property is passed to you from a spouse or civil partner, you won’t have to pay any inheritance tax at all.
Capital gains tax. When you eventually sell your property, you’ll need to pay capital gains tax on the profit you made. This will be taxed at a rate of either 18% or 24%, depending on how much money you made, minus an non taxable allowance on the first £3,000. There are ways to reduce your capital gains tax amounts. You can claim back deductions on:
Any loss you made on a previous buy-to-let property
Solicitor fees
Estate agent fees
Cost of any advertisements to sell or rent the property
The cost of stamp duty
Any money spent on “capital items”, such as machinery or equipment
What other expenses can and can’t you deduct from buy-to-let rental income on your tax return?
Your mortgage interest payments might be the largest expense you have on your property, but they won’t be the only ones. It can be handy to know what other types of financial costs are or aren’t allowed to be included as a deductible expense on a tax return. Allowable expenses:
20% of interest payments on your mortgage
Council tax
Buildings and contents insurance
Small property repairs and maintenance
Legal and professional fees
Advertisements for new tenants
Expenses you’re not allowed to deduct:
The remaining 80% of mortgage interest payments
Large home improvements, such as building an extension to a home
Any personal expenses which didn’t go towards the property
The changes to buy-to-let mortgage tax relief shouldn’t put you off finding out more about this handy home ownership scheme. Make sure to shop around and find the best rate for a buy-to-let mortgage if you’re thinking about applying for one.
How to save money as a landlord
Switch to a cheaper mortgage. If the interest rate on your mortgage is causing you a headache, find out whether you can get a better deal. Even a small change in the interest percentage can have a big impact on monthly repayments. Just remember, if you exit a fixed-rate mortgage early, you may have to pay an early repayment charge. It could be better to wait for your term to end before swapping.
Re-evaluate your buy-to-let insurance policy. Similarly, think about changing your insurance. It could be that your current landlord insurance plan covers more than you need. Saving a few extra pennies every month this way is quick and easy if you compare options.
Think about swapping to a cheaper energy provider in the home. If you include a fixed fee for energy bills in the rent you charge, you could look to cut costs here too. Shop around to find an energy bill which is less expensive.
Consider Houses in Multiple Occupation (HMO). HMOs are properties with three or more tenants who aren’t part of the same household or family unit. This is a popular option for landlords, as it minimises the individual impact of a missed rental payment. It also gives a landlord the option to set rent per room, rather than per property. This might mean making more in rental income on a monthly basis than if just one household were living there.
Consider placing your portfolio in a limited company structure. This slightly more complex option sees landlords create a business. This means they can continue to deduct their mortgage interest payments from their rental income. While that sounds great, there are other factors to keep in mind here:
Mortgages for businesses tend to have much stiffer interest rates
You’ll have to pay an extra round of stamp duty when you transfer ownership of the property
Taxes will be more complex, and you’ll have to pay corporation tax on any profits
It could be that after these additional points are taken into account, you actually take home less than with the 20% relief credit. This is something to speak to a financial advisor about before making any major decisions.
Think about transferring ownership of a property. If your spouse or partner is in a lower tax band, you could transfer ownership of the property to them. Just make sure when doing this that you aren’t accidentally pushing them up into a higher bracket.
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