The way in which unincorporated landlords obtain relief for interest depends on the nature of the property that they let. Where the property is a commercial property, the interest and finance costs can be deducted in full in calculating the taxable profits. However, for residential properties (with the exception of furnished holiday lets for 2024/25 and earlier tax years), relief for interest is now given in the form of a tax reduction, rather than as a deduction in calculating taxable profits. Until 5 April 2025unincorporated landlords letting furnished holiday lets can deduct the associated interest and finance costs. However, following the end of the favourable regime for furnished holiday lets, from 6 April 2025 onwards, relief for interest and finance costs on furnished holiday lets is by means of a tax reduction as for other residential lets.
The different relief mechanisms complicate the position where the landlord has a mixed portfolio or where a property has both a residential and a commercial element, such as a shop with a flat above it.
Mixed portfolios
If an unincorporated landlord’s portfolio includes both residential and commercial properties with associated loans, the interest on each loan is dealt with separately under the rules for that type of property.
Example
John lets out three houses and an office. The houses have mortgages of, respectively, £60,000, £100,000 and £120,000. John also has a commercial mortgage of £90,000 on the office premises.
In the tax year in question, John pays interest of £16,800 on the mortgages he has on the houses and a further £6,300 on the commercial mortgage.
The interest on the commercial mortgage can be deducted in full in calculating his profits for his property business. However, relief for the residential mortgages would be given in the form of a tax reduction of up to £3.360 (20% of £16,800) depending on the level of his property profits and taxable income.
Where the borrowings relate to the property business as a whole, the associated interest and finance costs will need to be apportioned between the different types of properties on a ‘just and reasonable’ basis. The legislation does not stipulate how this is to be done. Examples of possible apportionments would include by reference to floor area, purchase price at acquisition or when first let, or market value. An apportionment could also be made in relation to rental income. It is advisable to crunch the numbers to see which gives the best result.
Mixed-use properties
An apportionment of the interest and finance costs will also need to be made where the property has both commercial and residential parts. The apportionment should be made on a just and reasonable basis, and each part dealt with in accordance with the rules for that type of let.
Example
Brandon lets out a single-storey shop with a two-storey flat above it. He took out a loan of £180,000 to purchase the property, on which the interest for the tax year is £11,250.
Brandon apportions the interest by reference to floor area, allocating £7,500 to the flat (2/3 x £11,250) and £3,750 to the shop (1/3 x £11,250).
He is able to deduct the interest of £3,750 relating to the shop in calculating his taxable profits. Relief for the £7,500 relating to the flat is given in the form of a tax reduction of £1,500 (20% of £7,500).
Corporate landlords
Corporate landlords can deduct interest and finance costs in full in calculating their taxable profits regardless of the type of let. Consequently, there is no need to apportion interest and finance costs where a corporate landlord has a mixed portfolio or lets mixed-use properties.
