Understanding Interest Relief on Mixed Residential and Commercial Properties

How Interest Relief Works for Unincorporated Landlords

How unincorporated landlords claim relief for interest and finance costs depends on the type of property they let. Landlords can deduct these costs in full for commercial properties when calculating their taxable profits. However, for residential properties (excluding furnished holiday lets for the 2024/25 and earlier tax years), relief is provided through a tax reduction rather than a direct deduction from profits.

Changes from April 2025: Until 5 April 2025, unincorporated landlords letting out furnished holiday properties can still deduct interest and finance costs when calculating their taxable profits. However, from 6 April 2025 onward, these costs will only be eligible for relief through a tax reduction—the same rule that applies to other residential lets.

This distinction complicates matters for landlords who own a mixed portfolio or properties with both residential and commercial elements, such as a shop with a flat above it.

Managing Interest Relief for Mixed Portfolios

When a landlord’s portfolio includes both residential and commercial properties with associated loans, each loan is treated under the respective rules for that property type.

Example:

John owns three residential properties and an office, each with separate mortgages:

• House 1: Mortgage of £60,000
• House 2: Mortgage of £100,000
• House 3: Mortgage of £120,000
• Office: Commercial mortgage of £90,000

In a given tax year, John pays:

• £16,800 in interest on the residential mortgages
• £6,300 in interest on the commercial mortgage

How the relief applies:

• The £6,300 interest on the office is fully deductible from his property business profits.
• The £16,800 interest on the residential properties qualifies for a tax reduction of up to £3,360 (20% of £16,800), depending on John’s property profits and overall taxable income.

If the borrowings relate to the property business as a whole, the associated interest must be apportioned between residential and commercial properties on a ‘just and reasonable’ basis. While the law does not specify an exact method, common approaches include apportioning by:

• Floor area
• Purchase price
• Market value
• Rental income

It is advisable to calculate using different methods to identify the most tax-efficient approach.

Handling Interest Relief for Mixed-Use Properties

When a property includes both residential and commercial sections, landlords must apportion the interest and finance costs on a fair and reasonable basis. Each portion is then treated according to the rules for that specific property type.

Example:

Brandon owns a property consisting of a shop on the ground floor and a two-storey flat above it. He took out a loan of £180,000 to purchase the property and paid £11,250 in interest during the tax year.

He apportions the interest based on floor area:

• Flat: 2/3 of the property (£7,500)
• Shop: 1/3 of the property (£3,750)

How the relief applies:

• Brandon can fully deduct the £3,750 interest related to the shop from his taxable profits.
• The £7,500 interest related to the flat qualifies for a tax reduction of £1,500 (20% of £7,500).

Interest Relief for Corporate Landlords

Corporate landlords benefit from a simpler system. Regardless of whether they own residential, commercial, or mixed-use properties, they can deduct all interest and finance costs in full when calculating their taxable profits. As a result, corporate landlords do not need to apportion interest costs across different property types.

Key Takeaway: Understanding the different rules for interest relief based on property type is crucial for effective tax planning. With changes coming into effect from April 2025, unincorporated landlords should review their portfolios and assess how these shifts will impact their tax liabilities.

Partner note: ITTOIA 2005, ss. 271E, 272A, 272B.

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