FROM 6 April, this year, tax relief on mortgage interest payments for landlords was restricted to the basic rate (20 per cent) of income tax.
Prior to that date, landlords could claim tax relief on their mortgage interest payments. This meant that landlords could offset their mortgage interest against their rental income for the purposes of self-assessment. So, for example, a landlord that collects an annual rental income of £5,000 and pays mortgage interest annually of £4,000 would previously only pay tax on the difference between the two, which is £1,000.
However, this has all now changed. The mortgage interest relief has been restricted and will be completely phased out over the next four years as follows:
Tax year 2017/18 – 75 per cent of mortgage interest will be fully allowable at the landlord’s prevailing tax rate and the remaining 25 per cent available at the basic rate;
Tax year 2018/19 – 50 per cent of mortgage interest will be fully allowable and the remaining 50 per cent available at the basic rate;
Tax year 2019/20 – 25 per cent of mortgage interest will be fully allowable and the remaining 75 per cent available at the basic rate; and
Tax year 2020/21 – mortgage interest deduction will only be given at the basic rate.
Under the new system, by 2020/21 landlords will no longer be able to offset all the mortgage interest of £4,000. Instead landlords will only be permitted to offset 20 per cent of the £4,000, that is £800, which could push a basic rate taxpayer into a higher tax band.
These changes will not apply to limited companies and furnished holiday lets, but anyone wishing to change their property ownership structure may need to take advice on any Capital Gains Tax and stamp duty implications as the ownership change would involve a transfer of the property.
There are fears that these changes could force landlords to increase the amount of rent they charge for their properties, but at this stage it is too early to comment on the impact these changes will have.
Landlords who are not aware of this change should be urgently assessing their tax position and ensuring that they have made the most efficient arrangements possible.
Contact Chelton Brown on 01604 603433 or 01327 879431 or visit the website www.cheltonbrown.co.uk