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/ 17 100% Nil
2017/ 18 75% 25%
2018/ 19 50% 50%
2019/ 20 25% 75%
2020/ 21 Nil 100%

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/ 17 2017/ 18 2018/ 19 2019/ 20 2020/ 21
Net rental income 110,000 110,000 110,000 110,000 110,000
Less: interest (70,000) (52,500) (35,000) (17,500)             
40,000 57,500 75,000 92,500 110,000
Less: personal allowance (11,000) (11,500) (11,500) (11,500) (6,500)
29,000 46,000 63,500 81,000 103,500
Tax @ 20% 5,800 6,300 6,300 6,300 6,300
Tax @ 40% 5,800 12,800 19,800 28,800
Less: basic rate reduction              (3,500) (7,000) (10,500) (14,000)
Tax payable 5,800 8,600 12,100 15,600 21,100

 

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.