Following my article last week on Landlords’ Wear and Tear Allowances I was contacted by some of my readers to discuss their tax allowances in more detail. These discussions inevitably led on to the planned changes to Mortgage Interest Relief for Landlords so I have decided to talk about the details of the changes on this week’s article.
Currently residential Landlords are allowed to deduct the full amount of finance costs they have paid against their rental income. However the Chancellor announced last year that Mortgage Interest Relief for residential landlords would be restricted to the basic rate of income tax (20%) in the future.
The good news, however, is that the new rules are going to be introduced over a four year period starting from 6 April 2017 meaning that Mortgage Interest Relief will be available as follows:
- In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
- In 2018/19, 50% of the finance costs will be given as deduction and the remaining 50% will be given as a basic rate reduction.
- In 2019/20, 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic rate reduction.
- In 2020/21, None of the finance costs will be given as a deduction. 100% will be given as a basic rate deduction.
After the changes come in Landlords may remain as Basic Rate tax payers but for some the changes could end up pushing them in to the Higher Rate band. So let’s look at the following scenarios based on the figures for the final tax year in which the tax changes have their full impact (subject to changes in the personal allowance rate):
| Before | After | |
| Non-property Income | £ 20,000.00 | £ 20,000.00 |
| Rental profit excluding finance costs | £ 20,000.00 | £ 20,000.00 |
| Mortgage Interest | -£ 10,000.00 | £ – |
| TOTAL Income | £ 30,000.00 | £ 40,000.00 |
| Tax due | £ 3,880.00 | £ 3,880.00 |
In this first example above the Landlord would remain a Basic Rate tax payer after the changes so the tax due would remain the same. However when we look at the second example below it is a different story:
| Before | After | |
| Non-property Income | £ 30,000.00 | £ 30,000.00 |
| Rental profit excluding finance costs | £ 35,000.00 | £ 35,000.00 |
| Mortgage Interest | -£ 35,000.00 | £ – |
| TOTAL Income | £ 30,000.00 | £ 65,000.00 |
| Tax due | £ 3,880.00 | £ 8,403.00 |
This Landlord would be pushed in to the Higher Rate tax bracket after the changes meaning that the tax due would jump from £3,880.00 to £8,403.00.
As you can see from these examples the full impact of the changes will affect Landlords. However what I would say for now is don’t panic. You do have time to plan for the changes and get some professional tax advice so get planning!
If you want more news, views and commentary about the Locks Heath and Park Gate property market, there are more articles on the Locks Heath Property Blog at www.thelocksheathpropertyblog.co.uk.
For impartial buy-to-let advice feel free to contact me on 01489 570011 or at james.hill@brooklettings.co.uk.
thelocksheathpropertyblog.co.uk 