Landlords running an unincorporated property business can claim a tax reduction for interest and finance costs incurred in relation to residential lets (including holiday lets).
The tax reduction is 20% of the lower of:
- interest and finance costs;
- the profits of the property business for the tax year (after any losses brought forward); and
- adjusted total income (income after losses and reliefs that exceeds the personal allowance).
The deduction cannot create a tax refund.
If the interest and finance costs are higher than the business profits and/or the landlord’s adjusted total income, the interest and finance costs will not be relieved in full in the year in which they were incurred. Where this is the case, the unrelieved interest and finance costs are carried forward.
Example
Ali has a house which he lets out. He has a mortgage on the property, for which he pays £10,000 in interest a year.
In 2025/26, the profits from his property rental business were £8,000. His adjusted net income was £25,430.
Ali can claim a tax reduction in respect of his interest costs equal to 20% of the lower of:
- £10,000 (interest and finance costs);
- £8,000 (profits of the property business); and
- £25,430 (adjusted net income).
His tax reduction is £1,600 (20% of £8,000).
As his business profits are less than his interest costs, he cannot relieve the interest in full. The unused amount (£2,000) is carried forward.
In 2026/27, Ali’s interest remains at £10,000. However, this year the profits of his property rental business are £13,000, and his adjusted net income is £36,000. He can claim a tax reduction of 20% of the lower of:
- £12,000 (interest costs, being £2,000 brought forward from 2025/26 and £10,000 for 2026/27);
- £13,000 (profits of the property rental business); and
- £36,000 (adjusted net income).
His tax reduction is £2,400 (20% of the £12,000 interest costs). In 2026/27, he can secure relief both for the interest incurred in that year of £10,000 and the unrelieved interest of £2,000 brought forward from 2025/26.
