For unincorporated landlords, the way interest relief is applied varies depending on the type of property being let. If the property is classed as commercial, landlords can deduct all interest and finance costs directly when working out their taxable profits. In contrast, for residential properties, the rules are different: interest relief is provided as a basic rate tax reduction rather than as a deduction from profits—this excludes furnished holiday lets for the 2024/25 tax year and earlier.
Up to and including 5 April 2025, landlords of furnished holiday lets can continue to deduct interest and finance costs in full. However, from 6 April 2025 onwards, when the special tax treatment for furnished holiday lets is withdrawn, this relief will also switch to a basic rate tax reduction, in line with other residential properties.
These differing rules can create added complexity when a landlord owns a mix of property types or has a single property that includes both residential and commercial elements—such as a retail unit with a flat above.
Mixed Property Portfolios
When an unincorporated landlord holds a mixture of residential and commercial properties—each with their own associated borrowing—the interest on each loan must be treated according to the rules that apply to the relevant property type.
Example
John owns three residential houses and a commercial office space. He has mortgages of £60,000, £100,000, and £120,000 on the houses, and a separate commercial mortgage of £90,000 on the office.
During the relevant tax year, John pays £16,800 in interest on the residential mortgages and £6,300 in interest on the commercial mortgage.
The full £6,300 paid on the commercial mortgage can be deducted from the profits of his property business.
Meanwhile, the £16,800 interest paid on the residential loans qualifies for a basic rate tax reduction—potentially worth up to £3,360 (20% of £16,800), subject to John’s property profits and overall taxable income.
If a loan covers the property business as a whole, rather than being tied to a specific property type, the related interest must be allocated between the residential and commercial elements on a ‘just and reasonable’ basis. The legislation doesn’t define a set method, so landlords may choose to apportion based on factors such as floor space, original purchase price, market value, or rental income. It’s worth calculating a few different methods to see which yields the most favourable outcome.
Mixed-Use Properties
Where a single property contains both residential and commercial elements—such as a shop with a flat above—interest and finance costs must also be split appropriately. This split should be carried out on a ‘just and reasonable’ basis, with each portion of the interest treated under the rules that apply to that specific part of the property.
Example
Brandon owns a property comprising a ground-floor shop and a two-storey flat above. To purchase the property, he took out a loan of £180,000, and the interest due for the tax year totals £11,250.
To allocate the interest, Brandon uses the floor area as his basis. As the flat occupies two-thirds of the total space, he assigns £7,500 of the interest to the flat and the remaining £3,750 to the shop.
The £3,750 linked to the commercial part (the shop) can be deducted in full when working out his taxable profits. The £7,500 attributed to the residential portion qualifies for a basic rate tax reduction of £1,500 (20% of £7,500).
Corporate Landlords
For corporate landlords, the rules are more straightforward. Interest and finance costs can be fully deducted when calculating taxable profits, no matter whether the property is residential, commercial, or a mix of both. This means there’s no requirement to split or apportion these costs, even when the company owns a mixed portfolio or lets out mixed-use properties.
We help many individuals and landlords to ensure tax returns are correct and avoid a penalty. If you’re an existing landlord or a new landlord and need help with tax returns, contact us today on 01257 827029 or info@somosaccounting.com
