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Mortgage Interest Tax Relief – New Buy To Let RulesWritten on April 26, 2017 by Kirk Rice LLP

Mortgage Interest Tax Relief – New Buy To Let Rules
Taxing Times Questions

The Question:

I own a couple of buy to let properties which are mortgaged. I am aware that there are changes being introduced relating to the mortgage interest that I pay. Can you remind me what the new rules are?

Kirk Rice LLP answers:

Your question is quite timely because the first phase of the restriction of tax relief for mortgage interest began in April 2017. Effectively mortgage interest relief will be restricted to the basic rate of income tax (20%) and so higher rate tax payers will be paying more tax on their rental profits.

The change means that finance costs such as mortgage interest will no longer be able to be deducted in full to work out taxable property profits. All individual residential landlords with finance costs will be affected. The restriction works by disallowing finance costs in calculating the taxable rental profit, and then introducing a tax credit equal to 20% of the disallowed costs.

The restriction to finance cost relief for individual landlords is being phased in over four years. This means that in 2017/18, 75% of interest will still receive the old full relief and 25% be restricted to 20% relief. In 2018/19, it will be 50/50, 2019/20 it will be 25/75 and then from 2020/21 and beyond all interest will be restricted to 20% relief.

It is important to realise that an individual may too quickly ignore these new rules on the basis that they do not consider themselves to be higher rate tax payers. Taking an example, John Smith is in employment and has an income of £40,000 in 2017/18. He also has a buy to let property which earns gross rental income of £9,000 per annum, and he pays mortgage interest of £4,500 per annum. At first look it would seem that John’s total income is £44,500 (£40,000 + £9,000 – £4,500) which is within the basic rate tax band of £45,000. However, under the new rules 25% of the interest is disallowed and so the allowable interest is £3,375. John’s new total income is £45,625 (£40,000 + £9,000 – £3,375). £625 of John’s income is now subject to 40% tax. He will get a 20% credit for the remaining £1,125 of interest, but overall he will now pay £125 more tax than he would have done under the previous rules.

Companies are not affected by the new restrictions and will continue to receive relief for mortgage interest and other finance costs in the usual way. Individual landlords who choose to incorporate may experience difficulty and face tax charges such as stamp duty land tax on the market value of properties and possible capital gains tax on properties transferred into a company.


Property Investment – Buy to Let

Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875 000 in our Ascot office or Hadley Baldock on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk

If you would like to receive Kirk Rice’s Taxing Times Questions regularly by email, simply email info@kirkrice.co.uk stating Taxing Times Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.