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The new mortgage interest tax relief changes will impact many landlords – but not equally.
Here are the most common 3 situations so you know what to expect from this year.
Remember that until then the changes are rolled out gradually.
Let’s say that you have:
Before these changes, mortgage interest was a completely claimable expense: your taxable rental profit was rental income minus mortgage interest and expenses. Starting with 2017 and until 2020, the amount claimable went down every year, and now it’s zero:
| Before 2017 | After 2020 | |||
|---|---|---|---|---|
| Property profits | £5,000 | Property profits | £18,000 | |
| Total income | £42,000 | Total income | £55,000 | |
| Taxable income (2017 band) | Tax | Taxable income (2021 band) | Tax | |
| £11,000 x 0% (allowance) | £0 | £12,570 x 0% (allowance) | £0 | |
| £31,000 x 20% (basic rate) | £6,200 | £37,700 x 20% (basic rate) | £7,540 | |
| £0 x 40% (higher rate) | £0 | £4,730 x 40% (higher rate) | £1,892 | |
| Tax before relief | £6,200 | Tax before relief | £9,432 | |
| Mortgage relief | applied | Tax credit | £2,600 | |
| Payable tax | £6,200 | Payable tax | £6,872 |
Basically, since April 6 2020 the mortgage interest is not claimed as an expense at all, and instead a 20% tax credit is applied (20% on the mortgage interest) after the initial tax is calculated.
Even with higher personal allowance and tax bands, you still end up paying £700 more in tax in this case. That’s because the new rules pushed you into a higher tax band (40%).
Now let’s say that you have pretty much the same income figures but instead your income from self-employment was just a little bit lower:
| Before 2017 | After 2020 | ||
|---|---|---|---|
| Property profits | £5,000 | Property profits | £18,000 |
| Total income | £36,000 | Total income | £49,000 |
| Taxable income (2017 band) | Tax | Taxable income (2020 band) | Tax |
| £11,000 x 0% (allowance) | £0 | £12,570 x 0% (allowance) | £0 |
| £25,000 x 20% (basic rate) | £5,000 | £36,430 x 20% (basic rate) | £7,286 |
| £0 x 40% (higher rate) | £0 | £0 x 40% (higher rate) | £0 |
| Tax before relief | £5,000 | Tax before relief | £7,286 |
| Mortgage relief | applied | Tax credit | £2,600 |
| Payable tax | £5,000 | Payable tax | £4,686 |
Because the taxable income (even without deducted mortgage interest) was still out of the higher tax band, and because of the new, more generous tax bands in 2020, you end up paying £300 less in tax — although, of course, if you account for rental price changes, etc. the tax will probably stay the same…
Another way that landlords can benefit from the new rules is by carrying forward unclaimed finance costs.
Basically, the 20% tax credit applies to the lowest of:
If you invest in your property, for example you do repairs or extensive renovations, then your property profits (rental income minus expenses) might be the lowest.
In this case, you will apply the 20% tax credit to this amount, and then claim the difference between property profits and mortgage interest next year!
Let’s look at the same example, but with some added property expenses – and let’s say that we increased our rental income too (since we modernised our flat):
Then:
| After 2020 | |
|---|---|
| Property profits | £10,000 |
| Total income | £47,500 |
| Taxable income (2020 band) | Tax |
| £12,570 x 0% (allowance) | £0 |
| £36,430 x 20% (basic rate) | £7,000 |
| £0 x 40% (higher rate) | £0 |
| Tax before relief | £7,286 |
| Tax credit | £2,000 |
| Payable tax | £5,286 |
| Mortgage interest – property profits | £3,000 |
| This can be claimed as allowable expense in 2024/25 |
These calculations are obviously not simple – especially as you have multiple sources of income – so feel free to reach out to us at Taxscouts if you need help.
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