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Post budget mortgage interest tax relief


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Can anyone help me understand exactly what this means and how mortgage interest tax relief will be calculated?

Commentators seem to describe this as mortgage interest now being restricted 'to the basic rate'. However, until now mortgage interest was an allowable expense which could be deducted in full from your rental income irrespective as to whether you are a higher rate or basic rate tax payer.

Does it mean that rather than treating it as an allowable expense, the total allowable tax relief will be 20% of the total mortgage interest payments? Therefore is you have interest payments totalling £3,000 you'll get £600 tax relief. In which case a lower rate tax payer would be unaffected, but higher rate tax payers will be paying more (currently a higher rate tax payer would get £1,200 relief on £3,000 mortgage interest).

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Some landlords pay 40% tax on their profits & some pay 45%. From April 2017 mortgage interest on rental property will be restricted to 20%.

So if you pay, say, £4000 mortgage interest pa, currently a 40% tax payer could save £1600 from their tax bill (a 45% tax payer could save £1800). Under the new rules they will only be able to save £800 i.e. the same as a 20% tax payer.

I suspect the HMRC self assessment forms will be 'tweaked' so you just type in the numbers online and the system will automatically calculate the correct tax relief for you.

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At the risk of sounding a bit thick, I'm slightly confused here.

If you were to pay £8000 in interest payments pa and received £12000 in rent you would pay with 20/40/45% tax on £4000??

And the new rules would change that to 20%?

Is that right%

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If your total income, including the £4k profit from renting property puts you in the 40% or 45% tax bracket then your £8000 mortgage interest payments could only be offset at 20% (£1600) and not the current 40% (£3200) or 45% (£3600). The rest of the operating expenses for your rental business would continue to be offset as normal.

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Yes 12k less 8k = £4k

How much tax you pay on the 4k depends on how much total income you have. You may have income from employment, self employment, investments etc.

Let's assume you pay 40% tax on your income.

Under current rules you would pay 40% tax on £4000 = £1600 leaving you a profit of £2400

Under the rules that come into effect in April 2017 ....you will pay more tax because you will not be allowed to offset the £8000 of mortgage interest at your 40% rate. You will only be able to offset the expense at 20%. Offsetting £8k at 40% = saves £3200 in tax. Offsetting £8k at 20% = saves £1600 in tax. The result is that you will pay £1600 more in tax than you currently do

Therefore the new tax bill will be £3200 in total leaving a profit of £800

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Havent been on here for a while !

There are some very serious ramifications of the new budget plans.

Interest is no longer deductable from rent leaving bigger portfolio landlords moved upto 3 key nasty triggers:

1. from 20% to 40% band

2. more than 100K and then you will start to lose your personal allowance

3. 40% to45% tax band

also we will lose 10% wear & tear allowances on furnished props

When you have your rent less deductable allowances that would appear to set your tax band - you may then subtract a flat 20% of mortgage interest (and other prop related finnce interest) from the tax due

Analysis and examples of how the restriction of relief on buy to let mortgage interest will affect landlords.
By now I am sure you are all aware of the buy to let “bombshell” within the Chancellor's Summer Budget - the proposal to allow income tax relief on BTL finance costs at the basic rate of tax only - but I thought it might be helpful to show how this will affect the net (after tax) returns to landlords.
At this stage this is just a “Policy Paper” and I am sure there will be considerable debate with interested parties before this is implemented. However, for now we have to assume that it will be implemented as proposed starting in 2017/18.
So the good news is that for the next 1.75 years there is no change in the buy to let mortgage interest relief although a separate measure will get rid of the 10% “Wear and Tear” tax allowance for furnished lettings with effect from April 2016.
In looking at the impact of the proposals for interest relief I shall consider only the situation once the proposed measures come into effect fully in 2020/21 – during the preceding three years there is a “tapered” introduction of the measures. For the sake of easy arithmetic I shall assume that in 2020/21 the personal tax allowance is £12,000 and the basic rate band is £38,000, meaning that the higher rate band starts at £50,000.
Three examples of how it works
So let us consider three examples of somebody who owns a property worth say, £250,000 receiving a rent of £17,000 before letting and other costs of £2,000 and who has a mortgage of £180,000 with an interest cost of £9,000. Thus profit before rental interest is £15,000 and after interest it is £6,000.
Note the proposed buy to let restriction relates to “finance costs” not just interest – so lender application fees would appear to be covered by the proposals too.

Example 1

Mr A earns a salary (or if self-employed has a taxable profit) of £25,000. His “before” and “after” situation is as follows.

% Tax Current Rules Budget Proposals £ Tax £ Tax Salary £25,000 £25,000 Taxable rental profit £6,000 £15,000 Taxable income / profit £31,000 £40,000 Tax band Tax band Tax at 0% £12,000 £0 £12,000 £0 20% £19,000 £3,800 £28,000 £5,600 Less tax relief on interest 20% £9,000 -£1,800 Total tax £3,800 £3,800

In other words no change in the overall tax liability for this basic rate taxpayer. If Mr A was an employee suffering PAYE on his salary he will have already paid £2,600 of PAYE leaving him £1,200 of tax to pay on his rental income – i.e. 20% of his taxable rental profit of £6,000.

Example 2

Miss B earns a salary of £75,000. Her position is altered as follows:

% Tax Current Rules Budget Proposals £ Tax £ Tax Salary £75,000 £75,000 Taxable rental profit £6,000 £15,000 Taxable income / profit £81,000 £90,000 Tax band Tax band Tax at 0% £12,000 £0 £12,000 £0 20% £38,000 £7,600 £38,000 £7,600 40% £31,000 £12,400 £40,000 £16,000 Less tax relief on interest 20% £9,000 -£1,800 Total tax £20,000 £21,800

In this case her total tax bill has gone up by £1,800 due to the restriction on interest relief to 20% on £9,000 of interest expense – so £9,000 x (40% - 20%). She will have already paid £17,600 of PAYE and so the tax on her net rental income of £6,000 has effectively risen from £2,400 (£20,000 - £17,600) to £4,200 (£21,800 - £17,600) – an effective tax rate of 70% on her net profit.

Example 3

Mrs C might hope that she is not affected by the change since her salary is £43,000 – which together with her rental profit of £6,000 leaves her below the higher rate threshold of £50,000. But as the following example shows she does get caught by the restriction.

% Tax Current Rules Budget Proposals £ Tax £ Tax Salary £43,000 £43,000 Taxable rental profit £6,000 £15,000 Taxable income / profit £49,000 £58,000 Tax band Tax band Tax at 0% £12,000 £0 £12,000 £0 20% £37,000 £7,400 £38,000 £7,600 40% £0 £0 £8,000 £3,200 Less tax relief on interest 20% £9,000 -£1,800 Total tax £7,400 £9,000

Mrs C will suffer an additional £1,600 of tax as her gross income including her rental profit before tax deduction will be £58,000 – so her additional tax is £8,000 x (40% - 20%).
What should BTL investors do about this?
If an investor is considering buying a new rental property with a buy to let mortgage then they should consider making the investment through a limited company as there is currently no proposal for restricting the deduction of financing costs within companies. Indeed I struggle to think how this could be done without fundamentally changing corporate tax law. It is worth pointing out that the HMRC proposal is headed “Restricting finance cost relief for individual landlords” (my emphasis) – so it would appear that HMRC is well aware that corporate buy to let investment is not affected. Whilst there are some costs associated with running a limited company these are small compared with the potential savings.
Landlords with an existing portfolio and who are likely to have additional tax to pay under the proposals have just under two years to consider how best to counter this measure – whether to:

  • Sell up, or
  • Transfer the property into a limited company (which would involve paying Stamp Duty Land Tax and potentially Capital Gains Tax on the sale – as well as arranging a new mortgage), or
  • Do nothing and pay any additional tax.

We will be issuing further guidance in this area once the dust has settled but please note that

  • Whilst the measure is only fully effective in 2020/21, it starts in 2017/18 with one quarter of the interest being restricted to basic rate tax, rising to one half in 2018/19 and three quarters in 2019/20; and
  • There are provisions in the proposals to ensure that the new rules are not more generous than the existing deduction – for instance in years when letting shows a loss.


it is going to have far more impact than most people seem to think...even for 20% band tax payers.

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Thanks for that detailed break down Rodent, very interesting.

I'd like to mention an old favourite of mine which I roll out regularly. It's the all important ....'make sure you claim all your expenses against income tax'.

My experiences have shown me that virtually everyone misses at least one opportunity every year to claim legitimate expenses in order to reduce their tax bills.

Employing an accountant is no guarantee you are claiming all you are entitled to claim. NOW is a good time to make sure you reduce taxable profits.

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Slightly off above topic ,I agree with RL,s comment above . 2012/13 tax year HMRC would not accept my proportionate usage of our home phone as tax deductible, solution , additional phone line put in and only used for business use (calls in and out ) now tax deductible (calls and line rental and the fitting cost )

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Hi Hope all is well with you - George porgie is about to cause more chaos than even he envisaged i think ...still look at the implications of the new rip off regime that only applies to individual LL , not corporate structures . and only resi not HH lets or commercial lets ...well bend me over george ..

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  • 1 month later...

It doesn't seem sneaky to me and it doesn't have to make sense to you. The Gov can set the rules anywhere they like. They need to increase the Countrys income in order to reduce the deficit and by bringing some of those people who are not currently within the 40% tax bracket, into it, they will achieve an increase in income.

Someone has to pay......and you are one of them along with thousands of others who are affected.

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