Mortgage interest tax relief changes explained

How did the mortgage interest tax relief change?

Before 2017: The interest for your mortgage was 100% deductible. Since most individual landlords have interest-only mortgages, you could basically claim all mortgage repayments. That’s because you pay only the interest each month and the price of the property at the end of the period.

After 2017: The tax relief that landlords of residential properties get for finance costs is being restricted. The reduction is based on the basic rate of income which is currently 20%. HMRC outline the situation here, including some case studies on what this could mean for you as a landlord with one or many rental properties. 

Mortgage interest tax relief over the years

You can still deduct some of your finance costs but these deductions have been reduced over time, as you can see from the table below, and replaced with a basic rate relief tax reduction.

The reduction is the basic rate value of 20% of the lowest of:

• Finance costs like mortgage interest, loads to buy furnishings, and fees acquired when taking out or repaying mortgages/loans
• Property business profits
• Adjusted total income over the Personal Allowance

What happens now?

There are two questions to consider. 

1. Is your total income (without allowable expenses and mortgage interest) above £50,270, pushing you into the higher tax band?
2. Will you invest a significant amount into your buy-to-let property, on things such as renovations, repairs, or furnishings?

Here are the 3 outcomes possible, based on what your answers to the above questions are:

• You might pay more tax if removing the mortgage interest tax relief tips you into the higher rate
• No significant change if you don’t go into the higher rate
• You might benefit from carrying forward unused finance costs – see a detailed calculation of the changes in the mortgage interest tax relief here

Read our guide to paying tax on rental income here for more information.

Need more help to understand your options?

We can help. We offer one-off, personal tax advice from an accredited accountant, especially for landlords. Whether you’re looking to be more tax-efficient, getting your head around the changes in rental properties or anything else, we’ve got your back. Just £139 per consultation. Learn more here.