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Mortgage Interest Relief Changes

By Wasif Raza

 

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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