Mortgage interest and tax relief can have a significant impact on financial planning for sole traders and partnerships. Can sole traders claim mortgage interest on their tax returns? How does partnership mortgage interest relief work? The details might appear confusing at first glance. This article will clarify what mortgage-related expenses can be claimed and whether sole traders or partnerships can claim mortgage interest deductions, and help you choose the best option for your business.
What Is Mortgage Interest and Interest Relief?
Mortgage interest refers to the amount you pay to a lender for borrowing money to purchase a property. In the past, sole traders and partnerships could deduct mortgage interest as a business expense, but that is no longer the case for residential property businesses.
Instead, landlords and property owners now receive tax relief at 20% of their mortgage interest payments. This often leads to a higher tax bill, particularly for higher-rate taxpayers.
Can Sole Traders Claim Mortgage Interest?
No, sole traders cannot claim mortgage interest as an expense on their self-assessment tax return. Since 2017, the UK tax system has gradually replaced mortgage interest deductions with basic rate tax relief. Instead of reducing taxable profits, mortgage interest is now offset against tax liability at the 20% rate.
If a sole trader uses a property for both business and personal purposes, they can still deduct a portion of running costs like utility bills, but mortgage interest is not included in these deductions.
Exception for Furnished Holiday Lettings (FHL)
Until 5th April 2025, FHL (Furnished Holiday Lettings) properties were treated as a trading activity, allowing mortgage interest to be deducted as a business expense. However, from 6th April 2025, FHLs will no longer be able to claim 100% of the mortgage interest as a business expense. Instead, they will have to claim mortgage interest relief similar to investment properties, which means they will receive a basic rate tax credit of 20% on their mortgage interest payments.
This change aligns FHLs with other rental properties, where mortgage interest relief is restricted to a 20% tax credit, rather than being fully deductible against taxable income.
How Does Interest Relief Work for Sole Traders?
Interest relief allows sole traders to offset mortgage interest costs against their tax bill, but only at the basic rate of 20%. Under the previous system, mortgage interest could be deducted from rental income to lower taxable profit. Now, this method no longer leads to direct tax savings, often increasing tax payments for higher-rate taxpayers.
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Book AppointmentWhatsApp UsCan Partnerships Claim Mortgage Interest?
No, partnerships cannot deduct mortgage interest as a business expense for residential property businesses. Instead, they receive basic rate tax relief at 20%, which provides a limited tax reduction rather than reducing taxable profits. Previously, partnerships could deduct mortgage interest from taxable profits, lowering their overall tax liability. Under the current rules, partners, especially those in higher tax brackets, may face increased tax bills as they cannot offset mortgage interest against their share of profits.
Key Differences Between Sole Traders and Partnerships in Mortgage Interest Claims and Interest Relief
Sole traders and partnerships cannot deduct mortgage interest for residential property businesses. Instead, both receive basic rate tax relief at 20%. The key difference is that sole traders own properties individually, while partnerships share mortgage interest relief based on each partner’s stake.
Here are the key differences:
- Ownership Structure: Sole traders own their properties individually, while in partnerships, mortgage interest relief is shared among partners based on their stake.
- Tax Treatment: Neither sole traders nor partnerships can deduct mortgage interest for residential property businesses. Both receive only basic rate tax relief at 20%.
- Interest Relief Impact: This tax relief does not provide significant savings, especially for higher-rate taxpayers who previously deducted full mortgage interest costs from profits.
Understanding these distinctions is essential for effective tax planning and financial decision-making. Consult Swiftacc to navigate mortgage interest claims, maximise tax benefits for sole traders and partnerships, and ensure compliance with HMRC regulations.
