Making Tax Digital · Landlords
Section 24 mortgage interest relief: calculating residential finance restrictions
ONLY£15A MONTHA rental property can have modest cash left after its mortgage while showing a larger taxable profit.
A rental property can have modest cash left after its mortgage while showing a larger taxable profit. For individual residential landlords, mortgage interest is normally dealt with through a restricted tax reduction rather than deducted as an ordinary expense. Mortgage capital repayments are different again.
Separate profit from the tax reduction
The residential finance-cost restriction associated with section 24 of the Finance (No. 2) Act 2015 changes how relief is given. HMRC explains the calculation and limits.
Broadly, the reduction uses 20% of the relevant limited amount. Its availability depends on finance costs, property profits and adjusted total income under the statutory calculation. Unrelieved costs may be carried forward where permitted. It is not an unrestricted cash refund.
The rules mainly concern residential letting by individuals and certain other non-company taxpayers. Commercial property and company borrowing should not automatically be treated in the same way.
Keep lender statements. A bank debit cannot reliably show which part is interest, repayment of capital or another fee. Record qualifying residential finance costs separately so the annual calculation can use them correctly.
Worked example: why cash and taxable profit differ
Assume rent is £24,000, other allowable costs are £4,000 and qualifying interest is £6,000. Taxable property profit before other adjustments is £20,000. If all of it falls in a 40% band, tax before the finance reduction is £8,000.
If the statutory limits permit the full £1,200 reduction, the resulting tax is £6,800. Cash before mortgage capital repayments is £14,000. This simplified example excludes other income, allowances and reliefs; it shows the mechanism, not a universal landlord tax rate.
Keep the property business and the property detail clear
UK rental properties are generally brought together in one UK property business for Income Tax. Foreign property belongs in a separate business. A property reference remains useful for management and evidence, even though a separate quarterly submission is not normally required for every UK address.
HMRC's rental-income guidance explains the basic income and expense rules. For joint ownership, establish the share taxable on you before allocating receipts and expenses. The person whose account receives the money is not necessarily the person taxable on all of it.
Keep revenue costs, capital projects and residential finance costs identifiable. A mortgage payment can include a capital repayment and interest. Neither should be treated as an ordinary repair merely because it appears among the property's monthly outgoings.
For shared bills, use a reasonable allocation and retain the calculation. Do not claim the full same expense against several properties or owners. A property-level schedule should add back to the business totals and to the supporting statements. Those connections make it easier to answer a question about one address without losing sight of the portfolio as a whole.
Treat a tax estimate as a forecast
A bookkeeping profit is not necessarily your final taxable income, and an estimated liability is not always the amount still to pay. Employment income, pensions, savings, reliefs, tax already deducted and payments on account can all affect the final position.
An estimate is most useful when you understand its coverage. Check whether it uses year-to-date figures or projects a full year, whether all income sources are included and whether adjustments are still outstanding. A strong summer followed by a quiet winter should not automatically be projected as twelve identical months.
HMRC explains that estimates after quarterly updates can be incomplete when other income is missing or accounting periods do not align with the tax year. Read the estimate guidance within quarterly reporting.
Use a reviewed forecast to inform a cash reserve, then compare it with actual HMRC liabilities and payment dates. If you transfer money into a tax savings account, that transfer is not a business expense. If an estimate changes sharply, investigate the records and assumptions before assuming that your tax position itself has changed by the same amount.
Keep the evidence connected to the figures
Your digital record should explain the amount, date and nature of the transaction. Keep the invoice, receipt, statement or other evidence that supports it. A photograph can make a paper document easier to retain, but a folder of photographs alone does not create complete transaction records.
For sole traders, HMRC normally requires business records to be kept for at least five years after the relevant 31 January filing deadline. Keep them longer where the rules for a late return, enquiry or other circumstances require it. Check the record-retention guidance.
Make the records usable by your future self. Include a short explanation where a bank description is vague, retain the calculation behind a business-use split and make corrections traceable. For a missing receipt, try the supplier account, email confirmation or a replacement invoice before relying on incomplete evidence.
At review time, compare your records with the bank or payment account and investigate differences. Equal totals are useful, but two errors can cancel each other out. A sample of individual transactions can reveal a duplicated purchase or an omitted customer receipt that a totals-only check misses.
Review the wider personal position
A higher taxable property profit can affect income-related thresholds, even where cash flow is tight. Keep the finance-cost calculation with the property records and review it alongside employment income, pensions and other relevant information at year end.
Take the next step
Avona.app offers a self-service route from £15/month. Bring your records together, review the figures and choose a workflow that fits your business. For professional help, discuss the scope and total price of Avona Concierge, managed by chartered accountants, before choosing a service.