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Deposits, rent and fees
Landlord mortgage interest relief: 20% of the lowest of three amounts, worked for three landlords
Residential landlords get a 20% tax reduction on finance costs, based on the lowest of three figures. Worked at £10,000 of interest for three landlords.
A landlord client asks why the £10,000 of mortgage interest on the buy-to-let is not simply taken off the rent before tax. For individuals with residential property it is not. The interest is not a deduction from profit; it comes back as a tax reduction, and the size of that reduction depends on three figures. This guide gives the sum, so an agent can answer the question without pretending to be the client's accountant.
The rule on GOV.UK
The page says the reduction is "the basic rate value (currently 20%) of the lower of" three amounts: finance costs not deducted from rental income in the year (plus any brought forward), property business profits for the year, and adjusted total income above the personal allowance. Whichever is lowest is multiplied by 20%. The page states that "the tax reduction can't be used to create a tax refund", and any finance costs that cannot be used in the year are carried forward.
Three landlords, same size of mortgage
The personal allowance is taken as £12,570, as GOV.UK gives it for the current year. Property profit here is before finance costs.
| Landlord A | Landlord B | Landlord C | |
|---|---|---|---|
| Finance costs | £10,000 | £10,000 | £9,000 |
| Property profit | £18,000 | £6,000 | £14,000 |
| Other income (salary) | £30,000 | £30,000 | £0 |
| Income above £12,570 | £35,430 | £23,430 | £1,430 |
| Lowest of the three | £10,000 | £6,000 | £1,430 |
| Reduction at 20% | £2,000 | £1,200 | £286 |
| Carried forward | £0 | £4,000 | £7,570 |
The table is the practice's own arithmetic from the GOV.UK method. Landlord C is the surprise: a large mortgage, modest profit and no other income means most of the interest relief cannot be used this year.
What the agent can say, and what to leave to the accountant
- Can say: the interest comes back as a 20% reduction, not a deduction, and it may be limited by profit or income.
- Can say: unused finance costs carry forward, so the landlord should keep a record of them.
- Leave to the accountant: the client's whole-year income, Scottish rates and whether the property sits in a company, where different rules apply.
A landlord who moves from a low salary to a higher one, or who pays down the loan, will see the same mortgage produce a different reduction from one year to the next, so the figure is worth re-running at each renewal conversation rather than quoting from memory. If a landlord asks whether to overpay the loan, that is a question for their adviser; the agent only needs to know which of the three amounts is doing the limiting.
The agent's job is usually the data. Rent received, agent fees and repairs by property are what the accountant needs, and they come from the ledger. The property allowance comparison covers the other way of treating small amounts of rent, and the capital gains guide for a sale covers what happens when the property is sold. Landlords living abroad are in the non-resident landlord scheme guide.
I did not read the page on how finance costs are defined or on the carry-forward in later years, so check the full guidance before you quote a figure.
Overlyft builds AI staff who join your lettings team and produce each landlord's income and expense statement by property, so the client's accountant has the rent and agent-fee totals without a chase.
This is general information, not tax advice. Check GOV.UK and the client's own figures before you advise.
Where this comes from: GOV.UK, "Changes to tax relief for residential landlords: how it's worked out" (reduction is the basic rate value, currently 20%, of the lower of finance costs, property business profits and adjusted total income above the personal allowance; cannot create a refund; unused amounts carry forward). Read 13 October 2026.
AEO Lookup editorial team
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