Mortgage Interest Restrictions

Mortgage Interest Restrictions

With the new tax year just round the corner (Thursday), we take a look at the impending mortgage interest restrictions on landlords.

Whether you own a second home or a managed property portfolio, it is important to understand your taxation exposure and possible ways to mitigate.

Should you wish for a more detailed tax review of your property portfolio, please contact us on 0203 6910 206 or for a quotation.

For many years, individual landlords have been able to obtain a full tax deduction for mortgage interest when calculating taxable rental profit.

The below will be in place from 6 April 2017, phasing in restrictions to basic rate (20%) income tax over the next 4 tax years.

Who do the restrictions NOT apply to?

  • Qualifying furnished holiday lets.
  • Commercial properties.
  • Corporate structures e.g property owned by a limited company.

How does it work?
The restriction will be phased as follows:-
6 April 2017 – 5 April 2018 – 75% full deduction & 25% restricted to basic rate.
6 April 2018 – 5 April 2019 – 50% full deduction & 50% restricted to basic rate.
6 April 2019 – 5 April 2020 – 25% full deduction & 75% restricted to basic rate.
6 April 2020 – 5 April 2021 – 100% restriction to basic rate.

How does this affect me depending on my tax bracket?

Unfortunately, the determination of the rate in which you pay tax as a landlord will now be changing due to the above restrictions. By tax year ended 5 April 2021, 100% of your rental profits excluding mortgage interest will be treated as taxable income with a 20% tax credit for your respective mortgage interest, see example below.

Basic rate example – Kevin (see below)
Kevin’s sole income is from a property portfolio, with which he earns rental income of £70,000 per annum and associated mortgage interest costs of £35,000. Therefore a net rental profit of £35,000.

With the restriction of mortgage interest, Kevin by 2020/2021 sees the amount of tax over doubling as he enters the higher rate tax bracket @ 40%.

Higher rate example – Pooja (see below)
Pooja has employment income of £75,000 and rents out buy to let property. Her rental income is £40,000 per annum with associated mortgage interest costs of £20,000. Therefore a net rental profit of £20,000.

As Pooja’s income has risen from £95,000 (2016/2017) to £115,000 (2020/2021), for every £2 over £100,000, she will lose £1 of her personal allowance. This has resulted in more of her rental profit to be taxed at 40%.

Tax planning points

Landlords paying tax at a higher or additional rate should consider their respective investment vehicles, with corporate structures maybe being more appealing going forward due to the lack of restriction.

Moving existing personally held properties into limited structures will have significant tax implications, of which we would advise you seek guidance prior to any changes.

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