ERCs on buy-to-let mortgages: how the tax relief actually works (UK 2026)
An early repayment charge looks like a single, painful cash number on a redemption statement. For a landlord, it is also a finance cost — and what counts as a finance cost is taxed very differently depending on how the property is held.
This piece walks through the rules. It does not tell you what to do; it explains how the figures fall out on a representative refinance.
The worked example
Take a £270,000 buy-to-let interest-only mortgage on a 5-year fix at 4.32% — the Bank of England's most-recent 75% LTV 5-year fixed quoted rate, as printed on 1 April 2026 in the BoE monthly file (series 75LTV5Y).
Assume a tiered ERC of 5%/4%/3%/2%/1% across years 1–5 and a year-3 redemption. With interest-only payments, the balance is essentially unchanged at £270,000, so the ERC is roughly £270,000 × 3% = £8,100. After modest capital paid down on a part-repayment product (about £4,300 over three years on a 25-year term), the typical year-3 ERC sits at £7,713.
That £7,713 is the number we trace through three ownership structures below.
Why an ERC is a finance cost
HMRC treats early-redemption charges, exit fees, arrangement fees and broker fees on a property-business loan as incidental costs of obtaining finance — i.e., they sit in the same statutory category as the interest itself.
- For individuals, the rules live in s272A of the Income Tax (Trading and Other Income) Act 2005, introduced by Finance (No. 2) Act 2017. The detailed worked guidance is in HMRC's Property Income Manual at PIM2054.
- For companies, the equivalent rules sit in the loan relationships regime in Part 5 of the Corporation Tax Act 2009 — there is no s272A-style restriction.
That single legislative split is what produces the disparity below.
Three ownership structures, three different cash outcomes
The table compares the post-tax cost of the same £7,713 ERC.
| Owner | Tax treatment | Relief | Net cost of the ERC |
|---|---|---|---|
| Owner-occupier (main residence) | Not deductible — personal expense | £0 | £7,713 |
| Individual landlord (s272A) | Basic-rate (20%) tax reducer only | £7,713 × 20% = £1,542.60 | £6,170.40 |
| Limited-company landlord (small profits rate, 19%) | Full finance-cost deduction | £7,713 × 19% = £1,465.47 | £6,247.53 |
| Limited-company landlord (main rate, 25%) | Full finance-cost deduction | £7,713 × 25% = £1,928.25 | £5,784.75 |
Source: rates of corporation tax from HMRC: Corporation Tax rates. Individual landlord basic-rate restriction from PIM2054.
The gap between a higher-rate individual landlord and a main-rate-paying company on this single line is £385.65 on a £7,713 charge — about 5% of the cash number, all in.
What the s272A restriction actually does
Before April 2017, an individual landlord could deduct the full ERC against rental profits at their marginal income-tax rate — for a higher-rate (40%) taxpayer that gave £3,085 of relief on a £7,713 ERC.
The Finance (No. 2) Act 2017 changed the mechanics over a four-year tapered transition. From 6 April 2020 onwards, an individual landlord can no longer deduct any finance costs from rental income for income-tax purposes. Instead, the landlord receives a basic-rate tax reducer — a credit against their tax bill equal to the lower of:
- 20% of the finance cost,
- 20% of property profits (after deduction of other expenses), or
- 20% of total income (excluding savings and dividend income) that exceeds the personal allowance.
The published mechanic and worked examples are in PIM2058.
Two implications fall out:
- For a basic-rate (20%) taxpayer, the change made effectively no difference: 20% relief is the same either way.
- For a higher-rate (40%) or additional-rate (45%) taxpayer, the change roughly halved the cash value of the relief on every finance-cost line — including ERCs.
Why limited companies are unaffected
Companies are taxed under the loan relationships regime (CTA 2009 Parts 5–6). Interest, arrangement fees, exit fees and ERCs on a money debt are debits taken to the company's profit-and-loss account and are deductible against trading or property-business income, before corporation tax is computed.
- A small company with property profits below £50,000 pays 19% on those profits — so an ERC reduces the corporation-tax bill by 19% of the ERC.
- A company with profits above £250,000 pays the main rate of 25%, so the same ERC reduces the tax bill by 25% of the figure.
- Between £50,000 and £250,000 of profit, marginal relief applies — see HMRC: Corporation Tax marginal relief.
What the regime does not do is restrict finance-cost relief to a basic-rate equivalent. The corporate landlord that pays 25% on its profits gets the full 25% benefit of the ERC deduction.
The cliff edge for an individual higher-rate landlord
For an individual landlord on the 40% income-tax band, the table above understates the effective bite slightly, because finance-cost relief is no longer deductible before computing taxable income.
The restriction works by:
- computing rental profits as if no finance costs were paid,
- taxing those profits at the landlord's marginal income-tax rate,
- then giving back a 20% tax credit on the lesser of the three caps above.
That inflates apparent profit, which can push other income across thresholds — for example, into the £100,000 personal-allowance taper (where the personal allowance is withdrawn at £1 for every £2 of income above £100,000) or into the high-income child-benefit charge band. The s272A restriction can therefore have knock-on effects on unrelated parts of the tax return that the simple "20% credit" framing does not capture.
A 2026-style worked example: an individual landlord with £55,000 of rental profits before finance costs and £60,000 of employment income could, on paper, see their combined taxable income pushed into the £100,000+ band even though their economic income is well below it, depending on the broader picture. The right place to size that effect is on a return with a qualified adviser, not in a public article.
Limited-company landlords: timing matters
For a corporate landlord, an ERC is a tax-deductible expense in the accounting period in which it crops up. Two implications:
- If the company's profits in the year of refinance are below the £50,000 small-profits-rate threshold, the relief is computed at 19%.
- If profits sit in the marginal-relief band (£50,000–£250,000), the effective marginal rate is higher than 25% on the slice of profit being relieved by the ERC — because reducing profit by the ERC moves the company down the marginal-relief curve.
The published marginal-relief mechanic and a worked example are at HMRC: Marginal Relief for Corporation Tax. Sizing the precise relief in any given year is conveyancer-and-accountant territory.
What this changes about the refinance decision
It does not change the gross cost of an ERC — that is set by the lender's tariff in the original mortgage offer.
What it does change is the comparison between (a) sitting on the existing fix until it ends and (b) paying the ERC to switch into a lower-rate product mid-fix. The break-even point — the spread between current and new rates that just covers the ERC — sits at a lower spread for a limited-company landlord paying 25% corporation tax than for an individual higher-rate landlord on the s272A restriction, because the post-tax cost of the ERC is meaningfully lower.
A scenario calculator can size the comparison numerically. Try the mortgage comparison calculator with the deposit and price pre-seeded to model two products side by side with an ERC on the current product and overpayments on the new one.
For background on the broader ERC mechanics — including the lender's economic rationale and how the 10% overpayment cap acts as a free ERC buyback — see the sibling piece. For the wider cost stack between owning a BTL personally and through a company, see the corporate vs personal buy-to-let cost stack and the limited-company landlord profit-extraction tax stack. More material is indexed on the cost intelligence category.
The boring caveats
The s272A restriction applies to residential property businesses. Commercial-property landlords and furnished-holiday-let landlords sit outside it, although the FHL regime itself was abolished from 6 April 2025 by Finance Act 2024 measures. The position from April 2025 is that former FHL income is taxed as ordinary property income, with the s272A finance-cost restriction applying from that date.
A handful of edge cases sit outside the restriction:
- Loans relating to the let property but used for personal purposes — these are excluded from finance-cost relief altogether.
- Loans on overseas property — included in the same s272A framework when the landlord is UK-resident.
- Mixed-use properties — only the proportion attributable to the residential let is restricted.
None of these are summarised in this piece in enough detail to act on. The relevant guidance is at PIM2058 and PIM2054.
To model the lender side of the comparison — current rates by LTV, monthly payments on the new product, and a worked side-by-side that nets the ERC against the rate-spread saving — open the postcode tool with a representative Leeds postcode to see the data Homecost has on a representative BTL area, or run the numbers in the mortgage comparison calculator.
This is general information about the tax treatment of finance costs on residential property businesses. It is not advice and does not constitute a recommendation about any specific refinance, ownership structure or tax position. Speak to a qualified tax adviser or accountant before acting.