Mortgage Interest Relief for Residential Landlords

Measures announced in the April 2015 Budget which impact on residential landlords took effect from 6 April 2017.  Previously, relief for finance costs, primarily mortgage interest, was deducted in full from property income to arrive at the level of taxable rental profit. Under the new rules, a basic rate reduction, equal to 20% of the interest paid, will be applied to an individual’s tax liability for any finance costs incurred.

This change is being phased in over four years, commencing 2017/18, with the amount of deductible finance costs reducing by 25% each year, and the amount that may be claimed as a reduction to tax increasing by 25% each year as follows:

Year% of Interest Deducted from Rent% of Interest with Relief at 20%
2016/ 17100%Nil
2017/ 1875%25%
2018/ 1950%50%
2019/ 2025%75%
2020/ 21Nil100%

For Example

The landlord in this example has a portfolio of residential properties which is his only source of income.  His net rental income after deducting expenses such as repairs is £110,000 and from this he pays loan interest of £70,000.

2016/ 172017/ 182018/ 192019/ 202020/ 21
Net rental income110,000110,000110,000110,000110,000
Less: interest(70,000)(52,500)(35,000)(17,500)            
40,00057,50075,00092,500110,000
Less: personal allowance(11,000)(11,500)(11,500)(11,500)(6,500)
29,00046,00063,50081,000103,500
Tax @ 20%5,8006,3006,3006,3006,300
Tax @ 40%5,80012,80019,80028,800
Less: basic rate reduction             (3,500)(7,000)(10,500)(14,000)
Tax payable5,8008,60012,10015,60021,100

 

This landlord was a basic rate taxpayer in 2016/17. The restriction to the relief for loan interest, results in him paying tax at the higher rate from 2017/18. By 2020/21, the landlord’s tax liability has increased by more than £15,000. In 2020/21, when no deduction can be taken for the loan interest, the landlord’s income is £110,000. The personal allowance is reduced by £1 for every £2 over £100,000, meaning that with an income of £110,000, the landlord’s personal allowance is reduced by £5,000 to £6,500.

Note: for the purpose of the above example, the personal allowance for later years is assumed to be the same as for 2017/18 and the basic rate band of 20% is assumed to be £31,500 for 2017/18 onwards. The landlord is assumed to be a Scottish taxpayer.