How Mortgage Interest Is Taxed for Prime Central London Landlords

It is also one of the most frequently misunderstood. Many landlords still assume they can simply deduct their mortgage interest from their rent before working out the tax due. For properties owned in an individual's name, that has not been the case for several years.

With the tax on rental income set to rise again from April 2027, now is a good moment for Prime Central London landlords to make sure they understand how the rules work, how they affect the return on their property and what options are available.

How the rules work

Before 2017, individual landlords could treat mortgage interest like any other business expense, deducting it from their rental income before calculating their tax. The rules changed gradually over four tax years, and since April 2020 the restriction has applied in full.

Under the current system, landlords work out their rental profit by deducting allowable expenses such as letting and management fees, repairs, insurance, ground rent and service charges. Mortgage interest is not deducted at this stage. Instead, once the tax on that profit has been calculated, the landlord can claim a credit equal to 20% of their finance costs, which cover mortgage interest, the fees for arranging a loan and the interest on borrowing taken out to furnish the property.

Where the credit cannot be used in full in a particular year, for example because rental profits are low, the unused amount can usually be rolled forward and used later.

Who feels it most

For a basic-rate taxpayer, the effect of the change is relatively limited, because 20% is roughly what they would have saved in tax under the old rules under the old system. For higher and additional-rate taxpayers, the impact is much greater, because they only receive relief at 20% on interest that would previously have reduced their tax at 40% or 45%.

That matters a great deal in Prime Central London, where many landlords are higher or additional-rate taxpayers and where loans tend to be larger. Landlords whose mortgage interest represents a high proportion of their rent feel the restriction most of all.

A simple illustration

Consider a higher-rate taxpayer who lets a flat in Kensington for £60,000 a year. After £10,000 of allowable running costs, their rental profit is £50,000, and they pay £25,000 a year in mortgage interest. Assuming all of the profit falls within the higher-rate band, tax at 40% on £50,000 is £20,000. The 20% credit on £25,000 of interest reduces this by £5,000, leaving a bill of £15,000.

Under the old rules, the interest would have been deducted first, leaving £25,000 of taxable profit and a bill of £10,000. In this example, the restriction costs the landlord an extra £5,000 a year. The figures are simplified and the exact outcome will depend on an individual's wider income, but the principle applies to many leveraged landlords.

Other points worth knowing

The restriction applies to residential property only. Commercial property is treated differently. Furnished holiday lets, which used to enjoy more generous treatment, have been brought within the same rules following the abolition of the furnished holiday lettings regime in April 2025. Landlords who live abroad face the same restriction as UK residents, and where a property is owned jointly, each owner is taxed on their own portion of the income and costs.

Property held through a limited company is treated differently. A company can deduct its finance costs in full before calculating corporation tax. That is one reason why company ownership has become popular with some investors, although it brings costs of its own, including the tax payable when profits are drawn out, and transferring an existing property into a company can trigger stamp duty and capital gains tax. It is a decision that should only be made with specialist advice.

What landlords can do

For individual landlords, the restriction makes it more important to look carefully at how a property is financed and run. Reviewing the mortgage, particularly when a fixed rate comes to an end, can make a real difference to the overall return. Some owners choose to reduce their borrowing over time, especially where the interest is large relative to the rent.

Keeping thorough records of every allowable expense ensures that no relief is missed. Letting and management fees, repairs, insurance, service charges and the cost of replacing domestic items such as furniture and appliances can all be deducted, and with Making Tax Digital now applying to many landlords, accurate digital records are becoming a requirement in any case.

Above all, a well-run property that is let promptly to a reliable tenant at a realistic rent remains the best protection for any landlord's return. Void periods and avoidable costs hurt far more when tax relief on borrowing is limited.

A clear view of the numbers

The restriction on mortgage interest relief has been in place for some time, but its effect on returns continues to catch landlords out. With rental yields in Prime Central London now at their strongest for many years, letting can still make good financial sense. Understanding exactly how the tax works, and taking advice on the right structure and financing for your circumstances, is the key to making the most of it.

This article provides general information and is not tax advice. Landlords should take advice from a qualified accountant or tax adviser on their own circumstances.