Tax Relief on Interest Payments

You may be able to claim Income Tax relief on interest you pay on certain types of loan. This relief is available for qualifying loans used for specific business or investment purposes, though the rules have changed significantly for landlords letting residential property. Thi...

Introduction

What are qualifying loans?

A qualifying loan is a loan where the interest you pay can be offset against your income for tax purposes. The loan must be used for one of the purposes HMRC recognises as qualifying for relief.

You can only claim relief on the interest portion of your loan payments, not the capital repayment part. The relief is given by deducting the interest from your total income, which reduces the amount of tax you pay.

Types of qualifying loans

Loans for partnership capital

If you're a partner in a business partnership and you've borrowed money to:

Invest capital in the partnership
Lend money to the partnership for business purposes
Purchase machinery or equipment for use in the partnership

The interest on these loans qualifies for tax relief. You must be a partner at the time you took out the loan, or you became a partner within a reasonable time afterwards.

Loans to buy into a close company

You can claim relief on interest for loans used to:

Buy ordinary shares in a close company (a company controlled by five or fewer shareholders)
Lend money to a close company for business purposes

When you took out the loan, you or your spouse or civil partner must have owned more than 5% of the ordinary share capital. Alternatively, you must have owned some shares and worked the majority of your time in the actual management or conduct of the company.

The company must be a close company when you took out the loan and it must have been a trading company or the holding company of a trading group.

Loans to buy into an employee-controlled company

Similar relief applies if you borrowed to buy shares in an employee-controlled company, provided you were a full-time employee of that company.

Loans to pay inheritance tax

Interest on loans taken out specifically to pay Inheritance Tax due on a deceased person's estate can qualify for relief. This includes interest charged by HMRC itself on unpaid Inheritance Tax.

Loans to buy plant or machinery for work

If you're an employee and you borrowed money to buy equipment that you use in your employment duties, the interest may qualify for relief. The equipment must be plant or machinery that you're required to use to do your job.

Residential property finance costs restriction

The rules changed substantially for landlords of residential property from 6 April 2017 onwards.

Before 6 April 2017, if you let out residential property, you could claim full tax relief on mortgage interest and other finance costs as a business expense against your rental income.

From 6 April 2017, this relief began to be restricted. The restriction was phased in over four years:

2017/18: 75% of finance costs given as a deduction, 25% as a basic rate tax reduction
2018/19: 50% as a deduction, 50% as a basic rate tax reduction
2019/20: 25% as a deduction, 75% as a basic rate tax reduction
2020/21 onwards: 0% as a deduction, 100% as a basic rate tax reduction

From the 2020/21 tax year onwards, including the current 2025/26 tax year, you cannot deduct residential property finance costs from your rental income at all. Instead, you receive a tax credit worth 20% of the finance costs (the basic rate of Income Tax). This is a less generous relief, particularly if you're a higher-rate or additional-rate taxpayer.

This restriction only applies to residential property. If you let out commercial property (such as offices, shops, or warehouses), you can still deduct interest payments in full from your rental income in the normal way.

Limit on Income Tax reliefs

There's a cap on the total amount of Income Tax relief you can claim in a tax year. This applies to certain reliefs including qualifying loan interest.

The cap is set at the greater of:

£50,000, or
25% of your adjusted total income

This limit applies to the total of several reliefs combined, not just loan interest. If your claims exceed this cap, the excess relief may be carried forward to future years rather than being lost entirely.

How to claim relief

You claim relief for qualifying loan interest on your Self Assessment tax return in the 'other tax reliefs' section.

You'll need to keep records showing:

The purpose of the loan
The amount borrowed
The interest charged and paid
Evidence that the loan meets the qualifying conditions

For residential property finance costs (post-April 2017), you claim the basic rate tax reduction in a different section of your tax return – in the property pages rather than the 'other tax reliefs' section.

Beneficial loans

If you receive a loan from your employer at below-market interest rates, you may have to pay tax on the benefit. However, if you use that loan for a qualifying purpose (such as buying shares in your employer's company), you may be able to claim relief on the 'notional' interest – the interest you would have paid at the official rate.

What doesn't qualify

Interest on the following types of loan does not qualify for relief:

Loans to buy your own home or a property you live in
Loans for personal expenditure
Overdrafts (unless specifically arranged as a loan for a qualifying purpose)
Credit card interest
Loans taken out after the business activity or investment has ceased

Sources

Interest and alternative finance payments eligible for relief on qualifying loans and alternative finance arrangements (Self Assessment helpsheet HS340)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.