Mortgage Interest tax relief changes

For many years, one of the big attractions of Buy to Let for landlords has been the ability to offset 100% of the mortgage interest paid against rental income – reducing the taxable profit and effectively giving the landlord tax relief at their highest rate of income tax.

When mortgage lenders were willing to grant buy to let mortgages on an ‘interest only’ basis, that made borrowing money a great way for landlords to grow their portfolios.

That is changing from next month.  This new HM Revenue & Customs measure will restrict relief for mortgage interest payments, called “finance costs’ in HMRC language, on residential properties to the basic rate of Income Tax.  This will be introduced gradually from 6 April 2017.

What many people don’t realise is that finance costs not only includes mortgage interest, but also interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.  So if you are a landlord with a mortgage, make sure you are claiming the full amounts you should be.  No tax relief is available for capital repayments of a mortgage or any other loan.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.
So, this is a big tightening of the rules.  If you are unsure how you might be affected please do come and talk to us and if necessary, we can help you get more detailed tax advice from an accountant or other trusted professional.
Is this the end of Buy to Let?  We think not.  Over two thirds of property in the residential rental sector is mortgage free, so only around 30% of landlords will be affected by this change. Furthermore, this tax relief reduction only affects those landlords who are higher rate tax payers, so not every landlord with a buy-to-let mortgage will notice a change.  Even basic rate tax relief is well worth having.
Remember that homeowners paying off their own mortgages get no relief at all after the Government abolished it many years ago., so landlords remain at a distinct advantage.
It does however reinforce the need to maximise rental yield and have an agent that works hard to minimise void periods without a tenant at all.
Can we help?  Please give us a call on 01983 525710.