Landlord mortgage interest tax relief has always been an important way for a landlord to reduce taxable income but from 6th April 2017 the rules have changed for both UK based andnon resident landlords.
From April 2020 you will not be able to claim buy to let mortgage interest tax relief as an expense, but will be able to get a mortgage interest tax credit worth 20% of the interest instead.
HMRC are limiting the residential property finance costs tax credit to the basic rate of income tax which is currently set at 20%.
The 20% tax credit is now basically an income tax reducer which means as a landlord you don’t include mortgage interest costs as an expense on your self assessment tax return.
Who can claim mortgage interest tax relief?
The tax relief changes affect you if you let residential property, and you are:
- A partnership, individual or trust.
- A UK resident landlord.
- A non UK resident landlord.
- You are a trustee, or trust beneficiary, of a trust that must pay income tax on the profits from property.
The rules do not apply to incorporated companies, owners of furnished holiday lets or commercial properties.
How do landlords claim residential property finance costs?
You should claim residential finance costs in the property section of your self assessment tax return using box 44 “Residential property finance costs”.
Can Iandlords carry forward unused finance costs?
The new regulations can present advantages to property owners carrying forward unused residential finance costs.
A 20% tax credit is available and applies to whichever is the least among:
- The interest paid on your mortgage.
- Profits derived from properties.
- Adjusted gross income (essentially earnings after deducting your tax free personal allowance).
If you pay for undertaking necessary repairs or significant remodels, it’s possible that your profits from properties (rental returns minus expenditures) could be the smallest value.
Under these circ*mstances you’ll apply the mortgage interest 20% tax credit to this figure and then carry forward the difference between property profits and mortgage interest to use in the next tax year.
You should keep a running total of unused carried forward residential finance costs in box 45 of your self assessment tax return.
HMRC provides some helpful examples to demonstrate the impact of residential finance costs on your property income.
Are other finance costs effected?
The changes apply to your interest payments on overdrafts, loans and mortgages. They will also have an impact on some other costs:
- Mortgage and loan fees or other incidentals.
- Disguised interest.
- Discounts.
- Premiums.
- Alternative finance returns.
Some landlords get one loan to cover the purchase of residential and commercial properties.
If this is you, then you need to calculate what proportion of the interest is applicable to your residential properties.
The finance on your commercial properties is not restricted by the new rules.
You have to apply the same solution if you take a loan to purchase both residential property and other assets as a self employed sole trader.
Mortgage interest tax relief by tax year
The tax relief thatresidential landlordscould previously claim on their mortgage interest payments was gradually phased out over a period of four tax years.
Prior to 2017: The total interest paid on your mortgage was entirely tax deductible. Given that many private landlords have mortgages where the principal amount isn’t reduced over time, it essentially meant that all mortgage repayments could be claimed as deductions.
This is due to the fact that you are only required to pay off the interest each month, with the property’s cost being settled at the end of term.
Following 2017: The financial advantages received by residential property owners for their financing expenses have been subjected to limitations. These restrictions are shown by tax year in the table below:
| Tax Year | % of mortgage interest payments deductible from rental income | % of mortgage interest payments qualifying for the new 20% tax credit |
|---|---|---|
| Before April 2017 | 100% | 0% |
| 2017-2018 | 75% | 25% |
| 2018-2019 | 50% | 50% |
| 2019-2020 | 25% | 75% |
| After April 2020 | 0% | 100% |
Will landlords pay more income tax?
For residential landlords who pay tax in a tax bracket higher than the basic rate (20%) an increase in your tax bill is probable.
When mortgage interest tax relief was a fully deductible expense those who belonged to a higher rate band would get 40% relief while additional rate taxpayers benefitted from an impressive 45%.
However now all landlords receive relief only at the basic rate of 20% it means that those in higher and additional rate tax brackets have considerably greater costs associated with mortgage interest.
In addition because mortgage interest can no longer be deducted as an expense (which reduces your taxable income) some property owners could find themselves pushed into a higher tax bracket.
If you are a landlord who doesn’t have any finance costs or pays tax at the basic rate the implementation of residential property finance costs tax credit shouldn’t change your tax position significantly.
Should I incorporate my rental business?
Running a property business via a limited company allows you to deduct the entire mortgage interest as an expense which can lead to substantial tax savings throughout the lifespan of a mortgage.
For someresidential landlords incorporating their property businessmay well be one option which is worth considering.
But it is not a blanket answer for all landlords and incorporating should not be rushed into without careful consideration of your entire tax and financial position.
The process of incorporating as a landlord is complicated and there are many more elements than just residential property finance tax relief to be discussed.
It is highly advisable to talk to a landlord accountant to help you make your decision on whether incorporating your property business is the best right choice for you.
