Buy-to-let tax: the mortgage interest restriction (Section 24) and the 2027 property rates

How the restriction works

HMRC’s guidance sets the rule in one sentence: the reduction is the basic rate value of the lower of:

• finance costs: those not deducted from rental income in the year, plus any carried forward;
• property business profits: after any losses brought forward;
• adjusted total income: income above the personal allowance, excluding savings and dividends.

The reduction cannot create a refund. If it is capped by profits or adjusted income, the unused finance costs are carried forward to later years.

Which costs are restricted: interest on mortgages, on loans (including loans to buy furnishings) and on overdrafts, plus alternative finance returns, fees and incidental costs of getting or repaying loans, and discounts, premiums and disguised interest. A loan used partly for commercial property or a trade must be apportioned: only the residential share is restricted. Interest on a mortgage for a non-residential let property stays deductible.

Who is affected: UK-resident and non-resident individuals letting UK residential property, individuals letting through partnerships, and trustees or beneficiaries liable to income tax on residential property profits. UK and non-UK resident companies still get relief in the usual way.

HMRC’s example: when the restriction costs more tax

HMRC’s case study (2016 to 2017 rates, used for illustration): John earns £35,000 from self-employment and £18,000 rent, with £8,000 of mortgage interest and £2,000 of other expenses.

John becomes a higher rate taxpayer and pays £1,600 more. In HMRC’s first example, a landlord whose total income stays within the basic rate band pays the same as before; HMRC described that landlord as one of an estimated 82% with no extra tax to pay at the time.

From 6 April 2027: separate property rates

The Finance Act 2026 (Royal Assent 18 March 2026) adds property rates to the income tax system:

• Where: HMRC’s impact note says the rates apply to England, Wales and Northern Ireland. Section 8 of the Act lets the Scottish Parliament and the Senedd set their own property rates; it was brought into force on 16 September 2026 for 2027 to 2028 onwards. Payotte found no Scottish or Welsh property rates set for 2027 to 2028 on the pages it read.
• Finance cost relief: Schedule 1 of the Act changes the relief for residential finance costs to the property basic rate, so 22% instead of 20% from 2027 to 2028.
• Order of allowances: from April 2027, the personal allowance and other reliefs are applied to other income (such as wages or pensions) before property, savings and dividend income.

Our calculation, same rules. With £8,000 of mortgage interest, the reduction is £1,600 at 20% today and £1,760 at 22% from 2027 to 2028, if the finance costs are the lowest of the three amounts. The tax on the rental profit itself rises by 2 points in each band.

What you can still deduct

HMRC lists allowable expenses that are “wholly and exclusively” for the letting: maintenance and repairs (not improvements), water rates, council tax, gas and electricity you pay, landlord insurance, services such as cleaners and gardeners, letting agent and management fees, legal fees for lets of a year or less, accountant’s fees, ground rents and service charges, and direct costs such as advertising.

Not deductible: improvements and other capital spending (keep records, as they may reduce Capital Gains Tax when you sell), the capital part of mortgage payments, and the first purchase of furniture. Replacing furniture, appliances or carpets can qualify for replacement of domestic items relief. Alternatively, the property allowance gives up to £1,000 of property income tax-free, but then you cannot deduct expenses.

Joint owners

Married couples and civil partners living together are usually taxed in equal shares. If you own in unequal shares and are entitled to the income in the same shares, you can be taxed that way by declaring your beneficial interests. Other joint owners are usually taxed by their share of the property unless they agree otherwise. See joint tenants or tenants in common.

What this guide does not cover

Whether to hold property through a company, and the tax cost of transferring property into one, depend on facts HMRC’s general guidance does not settle. Payotte did not review HMRC’s Property Income Manual for this guide. Letting a room in your own home follows different rules: see the Rent a Room Scheme.

Which professional to consult

A tax adviser or accountant works out the reduction and the carry-forward in your Self Assessment return. A mortgage adviser can show how a buy-to-let lender tests rent against interest; see also mortgage affordability rules. Buying another property also triggers the higher rates of purchase tax.