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Any business owner taking out a mortgage/loan in order to finance capital to invest in a business is allowed to deduct interest paid from income received.
 
Renting is deemed to be a ‘business’ in the taxman’s eyes for income tax purposes. The ‘capital’ investment is the property itself. Any mortgage interest paid is deductible from rental income received but restricted to the market value of the property if originally not purchased with a view to rent.

Should an owner not use all of the available capital, the interest remains fully allowable (assuming that what is used, is used only for business purposes) because the original reason for the mortgage remains, namely to invest capital in the business in order to finance the purchase of property.

The loan does not need to be in the form of a mortgage secured on the property itself. Interest on a personal loan (even via use of a credit card) or secured on another property is deductible from the rental income received.

If cash is used to finance the purchase initially and then the property is mortgaged to replace the cash, the interest paid on the mortgage will be allowable in full against the rental income when received.

The reason for the interest payments being allowed is ‘intention’ – the intention being to purchase the property via a mortgage, the cash being used merely in place of a bridging loan.

Planning Tip:
For landlords, interest relief at the higher rates of tax is being phased out over a four-year period as from 6 April 2017 such that by the tax year 2020/21 only basic rate relief will be claimable. The relief will be given as a reduction on the lower of the interest affected, the rental profits, and the individual’s income (excluding savings and dividend income) for the tax year.