As fixed-rate mortgage deals expire, landlords often face the reality of higher interest rates upon remortgaging. The availability of tax relief for these increased interest payments varies significantly based on several factors, including the type of property being let, the let’s classification, and the structure of the property business—whether it’s unincorporated or a corporate entity.

For individual landlords with residential properties (excluding furnished holiday lets), the situation is particularly stringent. Interest and finance costs can’t be deducted from taxable profits directly. Instead, relief comes as a tax reduction, but only at the basic rate of 20%, even if the landlord is in a higher tax bracket. This relief is subject to limits based on the landlord’s income and property business profits, potentially resulting in some interest costs being carried forward.

On a brighter note, landlords of furnished holiday lets don’t face these restrictions. They can fully deduct interest and finance costs, enjoying tax relief at their marginal rate.

Commercial property landlords also have it better; they can deduct interest costs against their property business profits, securing relief at their marginal tax rate without the residential property lettings restrictions.

For property businesses operating through a company, the playing field is levelled. Interest and finance costs for all types of lettings are deductible from the company’s taxable profits, with relief at the corporation tax rate, which for the financial year 2023 lies between 19% and 25%.

Each scenario presents its own set of rules, and navigating them is key to maximizing tax efficiency in the world of property letting.

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