Understanding how Interest Tax Relief on Mixed Use Properties works is crucial for landlords. The tax treatment varies depending on whether the property is residential or commercial. Applying the correct rules ensures landlords maximise their tax relief while staying compliant with HMRC regulations.

How Interest Relief Works for Landlords

Unincorporated landlords claim interest relief differently depending on the type of property they let. The tax rules apply as follows:

• Commercial properties – Interest and finance costs are fully deductible when calculating taxable profits. There is no restriction on the relief claimed.
• Residential properties – Relief is given as a tax reduction rather than a deduction from profits. The reduction is limited to 20% of finance costs.
• Furnished holiday lets (FHLs) – Until 5 April 2025, landlords can deduct interest costs in full. From 6 April 2025, interest relief follows the same tax reduction method as other residential properties.

These differences create complications for landlords with a mixed portfolio or a mixed-use property. Understanding how to allocate interest expenses correctly is essential for effective tax planning.

Interest Relief for Mixed Portfolios

A landlord with both residential and commercial properties must calculate interest relief separately for each category. Loans linked to specific properties are treated under the relevant tax rules. However, if a loan covers multiple properties, landlords must apportion the interest between commercial and residential elements on a just and reasonable basis.

Example: Mixed Portfolio Interest Relief

John owns three houses 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

For the tax year, John pays:

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

John can fully deduct the £6,300 interest on the commercial mortgage when calculating taxable profits. However, for the £16,800 residential mortgage interest, he receives a tax reduction of up to £3,360 (20% of £16,800), depending on his taxable income.

Apportioning Interest for Mixed Portfolios

If a landlord’s loan finances both commercial and residential properties, interest must be apportioned on a just and reasonable basis. There is no fixed method, but landlords can use one of the following approaches:

• Floor area – Proportion interest based on the square footage of each property type.
• Purchase price at acquisition – Allocate interest based on the original property purchase price.
• Market value – Use the current market valuation of each property.
• Rental income proportions – Split interest based on how much rental income each property generates.

Landlords should explore different methods to determine which provides the most tax-efficient outcome. Consulting a tax expert can help landlords structure their finances effectively.

Interest Relief for Mixed-Use Properties

A mixed-use property contains both residential and commercial elements. A common example is a shop with a flat above it. In these cases, landlords must apportion interest costs between the two parts of the property.

Example: Mixed-Use Property Interest Relief

Brandon owns a shop with a two-storey flat above it. He took out a £180,000 loan to purchase the property and paid £11,250 interest for the tax year.

Brandon apportions the interest based on floor area:

• Flat (2/3 of total space) – £7,500 interest
• Shop (1/3 of total space) – £3,750 interest

He fully deducts the £3,750 shop interest from taxable profits. However, the £7,500 flat interest qualifies for a £1,500 tax reduction (20% of £7,500).

Apportioning Interest for Mixed-Use Properties

HMRC does not specify a single method for apportioning interest costs. However, common approaches include:

• Floor area split – Divide costs based on the proportion of space occupied by residential and commercial elements.
• Income split – Allocate costs based on the rental income generated from each section.
• Market value split – Assign interest based on the current property value for each use.

Choosing the most favourable method can make a significant difference in tax efficiency.

Interest Relief for Corporate Landlords

Corporate landlords operate under different tax rules than unincorporated landlords. They can fully deduct interest and finance costs when calculating taxable profits, regardless of property type.

For corporate landlords, there is no need to:

• Separate interest between residential and commercial properties.
• Apply tax reduction rules.
• Apportion interest for mixed-use properties.

This simplified tax treatment makes corporate structures an attractive option for some property investors. However, there are other tax considerations, such as corporation tax rates and compliance requirements.

Maximising Tax Efficiency for Landlords

Understanding tax relief rules ensures landlords maximise deductions and reduce their tax bill. Effective financial planning can significantly improve profitability.

Key Tax Planning Tips for Landlords

1. Review your portfolio structure – Consider whether incorporating your property business provides tax advantages.
2. Apportion interest effectively – Use a just and reasonable method to allocate finance costs.
3. Claim all available reliefs – Ensure you apply the correct interest relief for each type of let.
4. Monitor tax rule changes – Stay updated on legislative changes, such as the end of FHL tax benefits in April 2025.
5. Use professional tools and support – Budgetwhizz can help with financial planning and tax calculations.

Get Expert Advice

If you need guidance on tax relief, structuring your property investments, Interest Tax Relief on Mixed Use Properties, or financial planning, visit our accounting services. Our experts help landlords optimise their finances and stay compliant with tax laws.

Maximise your tax efficiency today. Contact us for expert support!