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I live in the UK and am a higher rate taxpayer (40%). If I have a buy-to-let property, I understand I can claim mortgage interest relief at 20%. Effectively I can only use half the interest as an expense.

However, what if it is a 2-bedroom property and I use one room, renting out the other room? It is not my main residence and I am not using the Rent A Room Scheme. Am I able to continue claiming mortgage interest relief for the whole mortgage, or would it be limited to a mortgage up to 50% of the value of the property?

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  • The motivation for my question is to decide how to fund the buy-to-let. I will be using two mortgages, borrowing against my main residence with a personal mortgage, and against the buy-to-let property with a BTL mortgage. I'm trying to decide what ratio of funding to use. Commented Jan 10 at 15:19

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My personal experience phoning HMRC a few years ago is that such expenses would be proportionally deductible, for instance by square metres or floors.

For instance if letting one self-contained floor of a house with 3 floors, enter 1/3 of the expenses. If you are a 40% tax payer, your tax return calculation should then give you a tax credit for 1/6th of the interest paid.

For just letting a room and sharing the rest with the landlord/lady, if you are not using the Rent a Room scheme, I imagine calculating a fraction based on the area of the room and a part of the kitchen plus either half a bathroom or one bathroom if there are more than one, and a part of the living room, depending in the end on what exactly the agreement (lodger license) says.

It may be easier and also save money to go with the Rent a Room scheme and no other deductions in stead if you can - unless you have some large deductible expenses.

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  • I see. So I wouldn't be able to "allocate" the mortgage expenses entirely to the room I've rented out, to offset against rental income. Commented Jan 10 at 15:31
  • I don't think so, because you would still be benefiting from the mortgage yourself, ie. probably only half or likely less could be considered a "business" or letting expense. Not 100% sure in case you live there part time (not your main residence), if that has an effect.
    – nsandersen
    Commented Jan 11 at 13:58

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