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Landlords and mortgage/finance relief restrictions

HMRC have introduced further changes from 6 April 2017 with regards to expenditure that can be claimed against rental income.

HMRC abolished the annual wear & tear allowance from 6 April 2016 and replaced this with the actual ’cost of replacing domestic items’. Landlords can deduct mortgage interest on loans taken out to purchase their rented properties, to calculate their taxable rental profit. From 6 April 2017, this relief is to be restricted to basic rate and will be phased in over a four year period:

  1. 2017/18-75% of the interest  will be deductible as an expense when calculating taxable profits  and the remaining 25% will be a basic rate tax credit
  2. 2018/19-50% of the interest  will be deductible  as an expense  when calculating taxable profits  and the remaining 50% will be a basic rate tax credit
  3. 2019/20-25% of the interest  will be deductible as an expense when calculating taxable profits  and the remaining 75% will be a basic rate tax credit
  4. 2020/21-100% of the interest will be relieved  at basic rate

The calculation is fairly complex so below is a simplistic example to show the impact from 2016/17 to 2020/21 using the 2016/17 personal allowances and rate bands;

  • Rents - £70,000
  • Loan Interest - £30,000
  • Net rental income - £40,000

Less:

  • Personal Allowance - £11,000
  • Taxable income - £29,000
  • Income tax due - £5,800

Less:

  • 20% tax credit for interest - £0

Total tax payable - £5,800

  • Rents - £70,000
  • Loan Interest - £22,500
  • Net rental income - £47,500

Less:

  • Personal Allowance - £11,000
  • Taxable income - £36,500
  • Income tax due - £8,200

Less:

  • 20% tax credit for interest - £1,500

Total tax payable - £6,700

  • Rents - £70,000
  • Loan Interest - £15,000
  • Net rental income - £55,000

Less:

  • Personal Allowance - £11,000
  • Taxable income - £44,000
  • Income tax due - £11,200

Less:

  • 20% tax credit for interest - £3,000

Total tax payable - £8,200

  • Rents - £70,000
  • Loan Interest - £7,500
  • Net rental income - £62,000

Less:

  • Personal Allowance - £11,000
  • Taxable income - £51,500
  • Income tax due - £14,200

Less:

  • 20% tax credit for interest - £4,500

Total tax payable - £9,700

  • Rents - £70,000
  • Loan Interest - £0
  • Net rental income - £70,000

Less:

  • Personal Allowance - £11,000
  • Taxable income - £59,000
  • Income tax due - £17,200

Less:

  • 20% tax credit for interest - £6,000

Total tax payable - £11,200

The mortgage interest restrictions will have  a significant impact  on gross  income  in later years. 

The interest relief restrictions do not apply to properties qualifying as ‘furnished holiday lets’ and ‘commercial properties’.

For further information please contact a member of our Tax team:

Strength in Numbers Spring 2018
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