Landlords and Mortgage Interest Tax Changes explained

Many landlords are going to see an increase in taxes as a result of the summer budget, when the chancellor announced his plans to reduce higher rate mortgage interest tax relief for landlords.

Mortgage interest relief at source was withdrawn from homeowners 15 years ago, however, landlords still receive the relief. The budget document concluded that, “the current tax system supports landlords over and above ordinary homeowners.” And according to the Chancellor, this decision will “level the playing field for homebuyers and investors”.


So what are the changes?

Currently for landlords of residential property, mortgage interest is an allowable expense, and when calculating taxable income, landlords deduct costs including mortgage interest from their rental income.

The government intend to restrict this relief to the basic rate of income tax for all landlords irrespective of their tax bracket. Consequently, for those landlords on higher rates of income tax, receiving 40/45% tax relief, this will now be phased out. The new rules will start from April 2017 and will be staged in over a 4 year period. HMRC estimate that only one in five individual landlords will be impacted by the changes.

Landlords earning under £42.7k in total, who pay the basic rate of tax will see no change to their net proceeds.


The changes will be phased as follows:

2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with remaining 25% available as a basic rate tax credit.

2018-19, 50% finance costs deduction and 50% given as a basic rate tax credit.

2019-20, 25% finance costs deduction and 75% given as a basic rate tax credit.

From 2020-21, and beyond, all financing costs incurred by a landlord will be given as a basic rate tax credit.


What should I do now?

For any landlord set to hit by these changes, here are a few suggestions to lessen any losses:-

Re-mortgage / Future Purchases

Don’t be surprised if interest rates rise between now and 2017. Is it time for you to re-mortgage for smaller mortgage costs? It would be worthwhile to get your properties re-valued to see if your portfolio has increased in value, a higher capital value leads to a lower LTV and better interest rates.

Also, it’s important to know what is sustainable to you, you may wish to streamline your portfolio, or consider the nature of property that you buy.

Check your spouse’s personal allowance

Remember, if your spouse is either a basic rate taxpayer or a non-taxpayer, you may be able to use their personal tax allowance and allocate the rental income fully or partially to them.

Become a Limited Company

It may be beneficial for you to transfer your properties into a company structure, known as incorporating a business, your overall tax rate can be reduced.

As a limited company, tax is only paid on your actual profit. If your profit reduces, so does the tax that you pay. If you remain as a sole trader after the changes, you will no longer receive full tax relief on your expenses, which means you can end up paying tax even when there is no profit.

When considering incorporation, always seek expert advice, we have only touched on a couple of points to stimulate thought.


Get expert help

Be well informed, it’s important to think longer term and not to leave anything to risk.

Speak with an expert; we have many landlord clients and will be happy to guide you through mortgage interest relief as well as the best ways to deal with the new rulings and its impact on you.

Call us now on 01253 899989 or you can book a free consultation.

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