Why mortgage interest is not an expense any more

What changed

Finance costs on residential lettings, principally mortgage interest, used to be deducted from rental income like any other expense. They are not any more. Instead you get a tax reducer: a credit worth the basic rate of tax on your finance costs, applied against your final bill.

OLD  Rent                          £14,400
     Less expenses                 -£3,900
     Less mortgage interest        -£5,000
                                  ---------
     Taxable rental profit          £5,500

NEW  Rent                          £14,400
     Less expenses                 -£3,900
                                  ---------
     Taxable rental profit         £10,500     <-- interest NOT deducted

     Then: tax credit of 20% of the £5,000 interest
     is taken off the tax you owe.

Notice what happened to the taxable profit figure. It nearly doubled, from £5,500 to £10,500, on identical real-world numbers. That inflated profit figure is the problem, and it is not merely presentational.

Why it matters more than it looks

Your taxable rental profit feeds into your total income. A larger reported profit can:

• Push you from basic rate into higher rate
• Begin tapering your personal allowance if total income passes £100,000
• Trigger the High Income Child Benefit Charge
• Affect other means-tested calculations that look at income

None of those are affected by the tax credit, because the credit reduces the tax bill at the very end. The damage is done at the income figure, before the credit arrives.

Who is affected, and who is not

The bit HMRC does not spell out

The credit cannot create or increase a loss. It is limited to the lowest of your finance costs, your property profits, and your total income above the personal allowance. If your rental profit is small and your interest large, part of the credit is simply unusable this year.

Unused finance costs are carried forward to future years rather than lost outright, which softens the blow but does not remove it. If you are highly geared, expect the relief to arrive later than the cost.

Common mistakes

• Still deducting interest as an expense. It overstates your relief and understates your income.
• Assuming the credit fixes everything. It arrives after your income figure has already done its damage.
• Applying it to commercial property. This is a residential-letting rule.
• Forgetting the credit is capped. Unused amounts carry forward instead.