HMRC begin removing Tax relief on mortgage Interest and other finance costs from April 17, how will this affect you?

In the 2015 emergency budget the chancellor announced his plans to restrict relief for mortgage interest and other finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6 April 2017.

 

Current rules

Up until April 17 Landlords can deduct their mortgage interest (plus associated costs like arrangement fees) along with their other costs before determining your taxable profit.

Example as follows;

Rental income             £12,000

Mortgage interest        £6,000

Other costs                  £2,000

Rental Profit             £4,000

The landlord would then be taxed on this profit at their marginal rate of either 20% = £800, 40% = £1,600 or if their total income is over £150,000 at the additional rate of 45%.

 

New rules

Under the new rules Landlords will no longer be able to deduct all of their mortgage interest and other finance costs from their property income to arrive at their rental profits. They will instead receive a basic rate reduction from their income tax liability for these costs.

Landlords will be able to obtain relief as follows:

  • in 2017 to 2018 the deduction from property income will be restricted to 75% of mortgage interest and other finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% mortgage interest and other finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% mortgage interest and other finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all mortgage interest and other finance costs incurred by a landlord will be given as a basic rate tax reduction

When the new measures fully take effect in April 2020 and below we look at the impact of this using the previous example above;

 

Example as follows;

Rental income             £12,000

Other costs                  £2,000

Rental Profit             £10,000

With no deduction for mortgage interest the effect of this would be as follows;

Basic Rate Tax payer = 10,000 x 20% tax       £2,000

Minus 20% of Mortgage Interest £4,000           £800

Tax due                                                          £1,200

This is therefore a £400 increase in tax when compared to the current rules

Higher Rate Tax payer = 10,000 x 20% tax    £4,000

Minus 20% of Mortgage Interest £4,000           £800

Tax due                                                          £3,200

This is therefore a £1,600 increase in tax when compared to the current rules

 

What can you do to minimise the impact of these new rules;

There are some options you could consider to minimise the impact of these new rules;

  • Limited Companies currently continue to receive the full deduction for mortgage interest and other finance costs, so you could consider moving your properties into a limited company. However before doing this you would need to also consider Capital Gains Tax implications, additional stamp duty potentially payable by the company and any mortgage exit charges applicable.
  • Furnished Holiday Lets also continue to claim full relief on mortgage interest and other finance costs so you could consider a move to this form of rental. There are however a number of specific rules to be considered and met in order to reach furnished holiday let status and this may not be appropriate for your type of rental properties.
  • If you don’t currently own property and considering buying you could put it into a Limited Company straight away so not to be caught by these rules at all.

 

Concerned how this new legislation will impact on you? Contact us and arrange a free initial meeting where we can help we can help explain these changes and how Frampton and Co could help provide you with a solution.

Telephone: (01424) 211141