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What is Finance costs?

Last verified 31 October 2026

Finance costs are the costs of borrowing to buy or run a let residential property. HMRC lists mortgage and loan interest, overdraft costs, fees, discounts and premiums as covered.

Why it matters to landlords

Since 6 April 2020 income tax relief on these costs has been limited to the basic rate for individuals, partners and trusts letting residential property. Companies are not affected. Only the interest and similar borrowing costs count: the capital part of a repayment is never an expense.

If one loan funds both residential and commercial lets, HMRC says the costs must be reasonably apportioned. Under Making Tax Digital for Income Tax residential landlords must record which costs are restricted finance costs, so tag arrangement fees and interest separately from repairs and agent fees.

Example

Hannah has an interest-only mortgage on a rented house. She pays £7,200 of interest in the year and a £400 arrangement fee when she moves to a new product. Her finance costs are £7,600. None of it is deducted from her rent: it feeds the 20% basic rate tax reduction.

Section 24 →

Related terms

• Basic rate tax reduction
• Section 24
• Finance cost restriction
• Buy-to-let mortgage
• Interest coverage ratio (ICR)

Sources

• GOV.UK: Income Tax when you rent out a property: working out your rental income
• GOV.UK: Changes to tax relief for residential landlords: how it's worked out including case studies