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3 examples of how the mortgage tax relief changes impact you

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 in 2019/2020.

Remember that until then the changes are rolled out gradually.

Example 1: Increase in tax

Let’s say that you have:

  • self-employment income: £39,500
  • self-employment expenses: £2,000
  • rental income: £20,000
  • mortgage interest: £13,000
  • property expenses: £2,000.

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 goes down every year, and in 2020 it’s zero:

Before 2017After 2020
Property profits£5,000Property profits£18,000
Total income£42,000Total income£55,000
Taxable income (2017 band)TaxTaxable income (2020 band)Tax
£11,000 x 0% (allowance)£0£12,500 x 0% (allowance)£0
£31,000 x 20% (basic rate)£6,200£37,500 x 20% (basic rate)£7,500
£0 x 40% (higher rate)£0£5,000 x 40% (higher rate)£2,000
Tax before relief£6,200Tax before relief£9,500
Mortgage reliefappliedTax credit£2,600
Payable tax£6,200Payable tax£6,900

Basically, after 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%).

Example 2: No significant change

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:

  • self-employment income: £39,500
  • self-employment expenses: £2,000
  • rental income: £20,000
  • mortgage interest: £13,000
  • property expenses: £2,000.
Before 2017After 2020
Property profits£5,000Property profits£18,000
Total income£36,000Total income£49,000
Taxable income (2017 band)TaxTaxable income (2020 band)Tax
£11,000 x 0% (allowance)£0£12,500 x 0% (allowance)£0
£25,000 x 20% (basic rate)£5,000£36,500 x 20% (basic rate)£7,300
£0 x 40% (higher rate)£0£0 x 40% (higher rate)£0
Tax before relief£5,000Tax before relief£7,300
Mortgage reliefappliedTax credit£2,600
Payable tax£5,000Payable tax£4,700

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…

Example 3: carrying forward unclaimed finance costs

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:

  • mortgage interest
  • property profits
  • adjusted total income (basically income after substracting the personal allowance).

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):

  • self-employment income: £39,500
  • self-employment expenses: £2,000
  • rental income: £30,000
  • mortgage interest: £13,000
  • property expenses: £20,000.


After 2020
Property profits£10,000
Total income£47,500
Taxable income (2020 band)Tax
£12,500 x 0% (allowance)£0
£36,500 x 20% (basic rate)£7,000
£0 x 40% (higher rate)£0
Tax before relief£7,000
Tax credit£2,000
Payable tax£5,000
Mortgage interest – property profits£3,000
This can be claimed as allowable expense in 2021-22

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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