Buy-to-let Mortgage Interest Tax Relief Changes

Tax accountancy Gloucester, tax accountancy London, tax accounting services Cheltenham

Up until the tax year 2016/2017 Landlords have been able to offset 100% of mortgage interest paid against rental income.   This is being phased out and replaced by a 20% tax credit allowance.   So landlords at the start of the 2020/2021 tax year will no longer qualify for relief on mortgage interest.   Instead they will only receive a 20% tax credit allowance.   The table below shows the phasing out percentages.

Tax Year % allowed of mortgage interest paid 20% tax credit allowance
2016/2017 100% 0%
2017/2018 75% 25%
2018/2019 50% 50%
2019/2020 25% 75%
2020/2021 0% 100%

What does this mean?   We can look at the impact in the simple table illustration below.

In this example we assume rental Income of £10k and mortgage interest of £8k.  We compare 2016/2017 tax year with 2020/2021 tax year.

  Tax Bracket 2016/2017 Tax Payable (£10K – £8k) 2020/2021 Tax Payable on Rental Income 2020/2021 20% Tax Credit on Mortgage Interest Total 2020/2021 Tax Bill   Tax Increase
20% £400 £2,000 £1,600 £400 £0
40% £800 £4,000 £1,600 £2,400 £1,600
45% £900 £4,500 £1,600 £2,900 £2,000

Ignoring capital growth and non-payment risk.   In the 45% tax bracket the landlord has net income of £10,000 less £8,000 mortgage interest = profit £2,000 but his tax bill is £2,900.   That is a monthly outgoing of £900.  

What Landlords should think about?

  1. The changes to mortgage interest tax relief only affect private landlords.
  2. Private Landlords should now consider setting up a limited company to reduce the impact of the new system.
  3. Some landlords may find that they are in the red after tax payments and it may be more beneficial to sell the property.
  4. Transfer of property ownership to a limited company may result in a Capital Gains Tax liability.
  5. Mortgage rates may vary for Companies over private individuals.

The new rules mean that Landlords must review their property investments and make sure the continued ownership of property for rental is worthwhile.   Seek expert financial advice to help make the right investment decision.