Are HMO mortgage payments tax-deductible?

Navigating the complex landscape of UK property tax as an HMO (House in Multiple Occupation) landlord requires careful attention, especially concerning mortgage payments. Since significant tax changes were fully implemented in the 2020/21 tax year, the way landlords claim relief on their finance costs has fundamentally shifted from a traditional deductible expense to a tax credit system. Understanding these rules is crucial for accurate self-assessment and maximising the profitability of your property investments.

Understanding Tax Deductibility: Are HMO Mortgage Payments Tax-Deductible in the UK?

The short and definitive answer regarding whether HMO mortgage payments are tax-deductible is no—not in their entirety, and the method of relief for the interest portion has changed significantly.

When discussing mortgage payments, it is essential to distinguish between the two primary components:

• Capital Repayment: This is the portion of the payment that pays down the actual loan principal. This is never tax-deductible in the UK, as HMRC views this as reducing a liability, not a business expense.
• Interest Payment: This is the cost of borrowing money. Historically, this was fully deductible against rental income. Since April 2020, this has been replaced by a different system of relief for most residential landlords.

For HMOs that are run as standard long-term residential rentals, they fall under the same rules as traditional Buy-to-Let (BTL) properties concerning finance costs. If your HMO meets the criteria for a Furnished Holiday Let (FHL), different tax rules may apply, but this is rare for typical HMO setups.

The Impact of Section 24: Finance Cost Restriction

The rules governing the relief of mortgage interest were phased in between 2017 and 2020/21 under legislation often referred to as ‘Section 24’ or the ‘Tenant Tax.’ This legislation removed the ability for residential landlords to deduct finance costs (including mortgage interest, arrangement fees, and loan costs) as a business expense.

Instead of a deduction, landlords now receive a 20% basic rate tax credit on their total finance costs. This is a critical distinction, especially for landlords whose rental income pushes them into the higher-rate (40%) or additional-rate (45%) tax brackets.

How the 20% Tax Credit Works

The mechanics of the 20% tax credit differ fundamentally from a direct deduction:

1. Calculate Gross Rental Income: You first calculate your total rental income for the year.
2. Deduct Allowable Operating Expenses: You subtract all your non-finance related, day-to-day operating expenses (e.g., repairs, utilities, insurance, letting agent fees).
3. Calculate Taxable Profit: The resulting figure is your taxable profit, which is added to your other income (such as salary) to determine your total tax liability.
4. Apply the Tax Credit: You then calculate 20% of your eligible mortgage interest and apply this amount as a credit directly against your final tax bill.

For a basic-rate taxpayer, the financial outcome of the tax credit is generally the same as the old deduction system. However, for a higher-rate taxpayer, the new system means they only receive 20% relief on an expense that they were previously able to claim 40% relief on.

Furthermore, under Section 24, your total taxable income is calculated before finance costs are considered. This can artificially inflate your total income, potentially pushing you into a higher tax bracket, or causing you to lose personal allowances or child benefit entitlements.

What Property Expenses Are Fully Deductible for HMO Landlords?

While the rules around finance costs have tightened, HMO landlords can still fully deduct legitimate operational and administrative expenses incurred wholly and exclusively for the purpose of renting out the property. These deductions lower your overall taxable profit before applying the 20% tax credit.

Common deductible expenses for HMOs include:

• Utilities and Council Tax: If the landlord pays these costs for the tenants (which is common in HMO arrangements).
• Insurance Premiums: Landlord insurance and specific HMO insurance policies.
• Maintenance and Repairs: Costs associated with repairing fixtures, fittings, and the structure of the property. Crucially, this excludes ‘capital improvements’ (see below).
• Professional Fees: Letting agent fees, property management costs, accounting fees related to the rental business, and legal costs for tenants.
• Safety and Compliance: Costs associated with mandatory HMO licensing, fire safety equipment, gas safety certificates, and electrical checks.
• Cleaning and General Upkeep: Costs of communal area cleaning or gardening services.

HMRC maintains very specific rules about what qualifies as a deductible repair versus a non-deductible capital improvement. A repair (e.g., fixing a broken window or replacing worn-out bathroom fixtures) is deductible. A capital improvement (e.g., building an extension, upgrading single glazing to double glazing, or installing a brand-new heating system where none existed before) is generally not immediately deductible but may be factored into Capital Gains Tax calculations later.

You can review HMRC’s detailed guidance on what counts as deductible rental expenses to ensure full compliance:

For detailed official guidance, please consult the HMRC guidance on property income.

Compliance, Records, and Seeking Professional Advice

Tax compliance for HMOs is often more demanding than for standard BTL properties due to the complexity of licensing, multi-tenant expense allocation, and the scale of maintenance required.

Record Keeping

All HMO landlords must keep meticulous records of both income and expenditure for at least six years after the relevant tax year. These records must clearly differentiate between finance costs (for the 20% credit) and operational expenses (for the deduction).

The Importance of Professional Guidance

Tax rules are complex and subject to change based on government budgets. Miscalculating deductions or applying the 20% tax credit incorrectly can lead to penalties from HMRC.

For investors managing an HMO portfolio, the interaction between finance costs, other sources of income, and potential capital improvements makes professional advice essential. A qualified property accountant or tax adviser will be able to structure your affairs in the most tax-efficient way possible while ensuring full compliance with current UK law.

If you are considering structuring your HMO business through a limited company, this may offer alternative tax treatment for mortgage interest, as limited companies are not subject to the Section 24 restrictions. However, this introduces its own compliance requirements and tax implications (such as Corporation Tax and dividend taxation), which must be weighed carefully with professional advice.

People also asked

Does the 20% tax credit apply to HMO finance costs?

Yes, the 20% basic rate tax credit applies to all residential property finance costs, including those associated with an HMO mortgage, unless the property qualifies as a Furnished Holiday Let or is owned via a limited company structure.

Are HMO insurance and licensing fees tax-deductible?

Yes, premiums for landlord insurance, specific HMO liability insurance, and mandatory HMO licensing fees required by the local authority are considered legitimate operational expenses and are fully deductible against your rental income.

What is the difference between a deductible expense and a tax credit?

A deductible expense (like repair costs) reduces your taxable income, lowering the base amount upon which tax is calculated. A tax credit (like the 20% relief on mortgage interest) reduces the actual amount of tax you owe after your overall tax liability has been calculated.

Can I deduct the cost of furniture and white goods in an HMO?

Yes, landlords can typically claim relief on the cost of replacing furnishings and equipment via the Replacement of Domestic Items Relief (RDIR). This allows you to claim a deduction for the cost of replacing items such as beds, sofas, carpets, and white goods, provided the replacement is of a similar standard to the item being replaced.

Does Section 24 restrict all landlord expenses?

No, Section 24 specifically restricts relief on finance costs (like mortgage interest). It does not affect the deductibility of day-to-day running costs, administrative fees, insurance, or general maintenance.

Summary of Tax Implications for HMO Mortgages

As an expert financial writer for Promise Money, we stress that HMO investment remains a viable strategy, but tax efficiency must be carefully managed. The rules governing tax relief on HMO finance costs are clear: capital repayments are never deductible, and mortgage interest is relieved via a 20% tax credit, not as a full business expense deduction.

This necessitates meticulous accounting and ongoing vigilance regarding your total tax position, especially if you are a higher-rate taxpayer. Always ensure that your HMRC Self Assessment is submitted accurately, reflecting the correct application of finance cost relief and the deduction of all legitimate operational expenses.

While the focus here is on tax deductibility, it is also important to remember the lending side. When seeking an HMO mortgage or bridging finance to acquire or convert an HMO, lenders will strictly scrutinise your cash flow and compliance status. Your property may be at risk if repayments are not made. Potential consequences of default include legal action, repossession, increased interest rates, and additional charges. Always borrow responsibly and budget carefully for potential void periods and unforeseen costs.