Tax Advice

Landlords: How to reduce the impact of mortgage interest relief changes

28 Oct 2015

Many landlords will see taxes increase and profits decrease as a result of the summer budget, with the chancellor announcing plans to remove mortgage interest relief.

What’s changed?

Under current rules, mortgage interest is an allowable expense for landlords. When calculating taxable income, landlords deduct costs including mortgage interest relief from rental income.

Under the new regime, expenses such as repairs and estate agent fees will still be allowable expenses, but higher rate tax payers’ entitlement to mortgage interest relief will be significantly reduced.

How do the changes to mortgage interest relief work?

Let’s assume a higher rate tax payer buys a property for £550k with a 75% mortgage and 3.5% interest rate. They rent out the property for £425 per week.

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This landlord has seen net proceeds fall substantially from £4,020 to £1,140.

Not all bad news

There are some mitigating factors and most landlords will not suffer as much as the example above.

Landlords who pay basic rate tax (earnings under £40k) will see no change in their net proceeds. The new tax relief system will entirely offset the change in treatment of mortgage interest.

Over the past decade, especially in London, many landlords have experienced significant capital and rental price growth. As a result, interest payments often represent a smaller percentage of income than the example above. The change in tax rules has a lesser impact on landlords with smaller mortgage costs.

Finally, the new rules will be phased in over a period of four years. Starting from the 2017/18 tax year, the impact will kick in and increase year on year until 2020/21, at which point it will be fully implemented.

Louis Lines

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MBA Qualified Business Strategy and Planning Specialist

0207 043 4000

About the author

Louis has had a diverse and interesting business career to date - a clear benefit of this is his real world commercial and practical experience and entrepreneurial spirit.

He has an MBA from Manchester University.

Other career experience includes a stint in the City, working with a renewable energy fund, working 30 miles south of the Canadian border building amazing timber framed houses and living the American Dream!  
Louis spends his time at Accounts & Legal providing creative solutions to complex problems. Whilst most accountants spend their time looking back at what a business has done in the past, Louis focuses on helping our clients look forward, planning for the future making sure that their business is best positioned to grow effectively.

  

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