Mortgage interest used to be an expense you took off the rent before working out the profit. Since April 2020 it is not deducted at all. Instead your tax bill is reduced by the basic rate of the interest, after everything else has been calculated.

For a basic-rate landlord that is close to neutral — relief at 20% given back replaces relief at 20% taken away. For a higher-rate landlord it is not: you lose relief at 40% and get it back at 20%.

⚠ The part that surprises people is that the profit your tax is worked out on is now bigger than the money you actually made. A heavily mortgaged property can show a taxable profit that pushes you into a higher band, or over the £100,000 allowance taper, or past the child benefit threshold — on income you never saw.

The reduction is capped, three ways

It is the basic rate of the lowest of these, and which one applies changes with your circumstances:

• Your finance costs — the ordinary case.
• Your property profit — bites when the interest is larger than the profit it is set against, which is common on a recently bought or remortgaged property.
• Your income above the Personal Allowance — bites when property is most of what you earn, because there is not enough tax there to reduce.

Anything the cap denies is not lost. It carries forward and can be relieved in a later year, which is the one piece of good news in the rule and the part most often missed.

What this does not cover

It assumes one property business, no brought-forward losses or finance costs from earlier years, no savings or dividend income, and that the property is residential and held personally — the restriction does not apply to companies, furnished holiday lettings or commercial property. It ignores capital allowances, the property allowance, and joint ownership splits.

Where these rates come from

The reduction is the basic rate of Income Tax, read from the same dated rate file as every other figure on this site. See Work out your rental income and Restricting finance cost relief for individual landlords on gov.uk.