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From April 2017 onwards, the government announced new changes to the way mortgage interest relief is calculated on buy to let properties. Before, under the old rules, you were able to deduct the full cost of your mortgage interest from your rental income to arrive at your taxable income figure.
Rental income: 40,000
Mortgage Interest: (9000)
Rental income = 31,000
Less PA = (11,500)
Taxable Income = 19,500
Tax due @ 20% = 3,900
Under the new rules, from 2017/2018 onwards, you are only allowed to claim 75% of your mortgage interest against your rental income. Then when your tax has been calculated, 25% of your total mortgage cost will be multiplied by 20% to get the tax credit which will be deducted from your tax bill. See below for a working example.
Rental income: 40,000
Mortgage Interest allowable @ 75% (6750)
Rental Income = 33,250
Less PA = (11,500)
Taxable Income = 21,750
Tax @ 20% = 4,350
Deduct the new 25% relief:
Mortgage interest relief : (450)
Tax due @ 20% = 3,900
As you can see, for basic rate tax payers this change has made no difference to their tax due at the end of the year.
However the change does make a difference to tax payers in the higher rate tax bracket as the relief they will be claiming will be restricted to 20% even though they are paying tax at the 40% rate.
Get in touch with us at M Raza & Co if you would like more advice on the changes and how it may affect you.
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The information provided on this web site is of a general nature. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from a professional accountant before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties. The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice.
