Changes to the tax relief on mortgage interest for landlords

Changes to the tax relief on mortgage interest for landlords

Tuesday, 10 July 2018

From April 2017, there were significant changes to the tax relief you can get for mortgage interest on property lettings.

This change doesn’t affect commercial property or furnished holiday lettings, nor does it apply to companies who let residential property.
 
Previously, mortgage interest paid on a property letting could be claimed as an expense against rents received. This gave the landlord relief for the interest paid at the marginal rate of tax, which could be as high as 45%. 

However, from the 2017/18 tax year, only part of the mortgage interest paid is allowable as a deduction from income when calculating taxable property income. Therefore, tax relief at the marginal rate of tax is reduced.

The balance of the interest is treated as a reduction in arriving at the individual’s income tax liability (a tax reducer). The reduction is calculated at 20% of the restricted interest. The rules are being phased in progressively, as shown in the below table.

Tax year

Percentage treated as             income deduction

Percentage treated as                   tax reducer

2017/18

75%

25%

2018/19

50%

50%

2019/20

25%

75%

2020/21

0%

100%

For example, in 2017/18, if loan interest is paid of £5,000, 75% of that amount (£3,750) will be deducted in full in arriving at property income. The remaining 25% (£1,250) will only qualify for 20% tax relief. By 2020/21 the full £5,000 mortgage interest will be treated as a tax reducer and therefore only £1,000 of tax relief obtained. (In 2016/17, a higher rate taxpayer would have £5,000 deducted from their rental income and would have obtained tax relief of £2,000.)

These changes will result in significantly more tax being paid by some landlords. We’re already seeing examples where in 2020/21 landlords will have a tax bill larger than their net profit – an outcome which should raise serious questions about what to do with the property letting going forward.

Landlords who are basic rate taxpayers may also be affected. Their taxable income will be higher, which might result in them falling into a higher tax bracket!

If you have any queries about the new rules or would like further guidance about how this might affect you, please speak to our specialist tax team on 0330 024 0888.

Jordan Brown

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