Restricting Tax Relief for Mortgage Interest - what is the position?

18th February 2016

From April 2017 the government will restrict tax relief for mortgage interest payments to individual landlords to the basic rate of tax. The restriction will be brought in over four years.

What Does This Mean

At the moment, tax relief for mortgage interest is given as an expense in the property business accounts which reduces property business profits as follows:

Example 1

Rental income

 

30,000

Deduct

 

 

Repairs

2,500

 

Mortgage interest

15,000

 

Management fees

4,500

22,000

Taxable profit

 

8,000

Tax due at 20%/40%/45%

 

£1,600/£3,200/£3,600

Once the new rules are fully in place, the position will be;

Example 2

Rental income

 

30,000

Deduct

 

 

Repairs

2,500

 

Mortgage interest

0

 

Management fees

4,500

7,000

Taxable profit

 

23,000

Tax due at 20%/40%/45%

 

£4,600/£9,200/£10,350

Mortgage interest credit £15,000 @20%

 

£3,000

Tax due at 20%/40%/45%

 

£1,600/£6,200/£7,350

 

So for a higher rate (40%) taxpayer the tax in this example has increased from £3,200 to £6,200 on rental income of £30,000 and for an additional rate taxpayer from £3,600 to £7,350. 

Perhaps more importantly though, taxable income has increased from £8,000 to £23,000 and this will be relevant when looking at income limits for tax rates, tax credits, restriction of personal allowances and the high income tax charge for child benefit. 

What Can I Do

Some of the planning options include:

If you have more than one property you may consider selling a property and repaying some borrowing. You need to check the capital gains tax position first to ensure you are not faced with an unexpected capital gains tax bill.

You may wish to consider transferring your property business into a limited company in certain circumstances as the mortgage interest restriction does not apply to companies. You need to seek professional advice first though as this will only be appropriate in certain circumstances.

You may wish to consider switching to a commercial portfolio.

You may wish to consider operating your property business as a furnished holiday let.

Karen Oliver | Brighton Accountant | Plus Accounting

For further information, please contact Karen Oliver on 01273 701200 or kareno@plusaccounting.co.uk

Author: Karen Oliver, Tax Manager @ Plus Accounting, Brighton

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