Mortgage Interest Tax Relief

Fri 19 May 2017

From April 6th, this year, tax relief on mortgage interest payments for landlords was restricted to the basic rate of (20%) income tax.

Prior to April 6th, landlords could claim tax relief on their mortgage interest payments. This meant that landlords could offset their mortgage interest against their rental income for the purposes of self-assessment. So, for example, a landlord that collects an annual rental income of £5,000 and pays mortgage interest annually of £4,000, would previously only pay tax on the difference between the two which is £1,000.

However, this has all now changed. The mortgage interest relief has been restricted and will be completely phased out over the next 4 years as follows:

Tax year 2017/18 – 75% of mortgage interest will be fully allowable at the landlords prevailing tax rate and the remaining 25% available at the basic rate;

Tax year 2018/19 – 50% of mortgage interest will be fully allowable and the remaining 50% available at the basic rate;

Tax year 2019/20 – 25% of mortgage interest will be fully allowable and the remaining 75% available at the basic rate; and

Tax year 2020/21 – mortgage interest deduction will only be given at the basic rate.

Using our simple example above, under the new system by 2020/21 landlords will no longer be able to offset all the mortgage interest of £4,000. Instead landlords will only be permitted to offset 20% of the £4,000, that is £800, which could push a basic rate taxpayer into a higher tax band.

These changes will not apply to limited companies and furnished holiday lets. However, anyone wishing to change their property ownership structure may need to take advice on any CGT and stamp duty implications as the ownership change would involve a transfer of the property.