It was announced in the Summer 2015 Budget that there will be changes to how taxpayers will obtain relief for mortgage interest they pay on rented properties.
The new rules will commence from April 2017 and will be phased over 4 years. This will mean higher tax bills for those who pay tax at the higher rate band (earning over £42,385 in tax year 2015-16).
The key changes on Mortgage Interest::
- Mortgage Interest will no longer be included in the rental accounts
- It will however be allowed as a deduction from the tax computation, with relief provided at basic rate of 20%*
- This will be phased in over 4 years from April 2017 as follows:
YEAR % Disallowed from rental accounts with relief provided at basic rate
2017-18 25% of Mortgage Interest Payments
2018-19 50% of Mortgage Interest Payments
2019-20 75% of Mortgage Interest Payments
2020-21 100% of Mortgage Interest Payments
*20% relief provided on the lower amount of a) interest calculated b) profits of rental business and c) excess of total income (excluding savings and dividend) over personal allowance. Any unused interest relief will be carried forward to future years.
ILLUSTRATIVE EXAMPLES
Example assumption: rental income of £15,000 and paying mortgage interest of £10,000.
Basic Rate Tax Payer
|
Current Position |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
|
|
Rental Income |
£15,000 |
£15,000 |
£15,000 |
£15,000 |
£15,000 |
|
Mortgage Interest |
(£10,000) |
(£7,500) |
(£5,000) |
(£2,500) |
– |
|
Rental Surplus |
£5,000 |
£7,500 |
£10,000 |
£12,500 |
£15,000 |
|
Other Income |
£20,000 |
£20,000 |
£20,000 |
£20,000 |
£20,000 |
|
TAX CALCULATION |
|||||
|
Total Income |
£25,000 |
£27,500 |
£30,000 |
£32,500 |
£35,000 |
|
Less: Personal Allw |
(£10,600) |
(£10,600) |
(£10,600) |
(£10,600) |
(£10,600) |
|
Total Income |
£14,400 |
£16,900 |
£19,400 |
£21,900 |
£24,400 |
|
Tax @ 20% |
£2,880 |
£3,380 |
£3,880 |
£4,380 |
£4,880 |
|
Tax @ 40% |
– |
– |
– |
– |
– |
|
Interest Relief @ 20% |
– |
(£500) |
(£1,000) |
(£1,500) |
(£2,000) |
|
Total Tax Due |
£2,880 |
£2,880 |
£2,880 |
£2,880 |
£2,880 |
|
Increase in Tax |
Nil |
Nil |
Nil |
Nil |
From the example above we can see how there would be no change to the total tax due for a basic rate tax payer.
Higher Rate Tax Payer
|
Current Position |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
|
|
Rental Income |
£15,000 |
£15,000 |
£15,000 |
£15,000 |
£15,000 |
|
Mortgage Interest |
(£10,000) |
(£7,500) |
(£5,000) |
(£2,500) |
– |
|
Rental Surplus |
£5,000 |
£7,500 |
£10,000 |
£12,500 |
£15,000 |
|
Other Income |
£50,000 |
£50,000 |
£50,000 |
£50,000 |
£50,000 |
|
TAX CALCULATION |
|||||
|
Total Income |
£55,000 |
£57,500 |
£60,000 |
£62,500 |
£65,000 |
|
Less: Personal Allw |
(£10,600) |
(£10,600) |
(£10,600) |
(£10,600) |
(£10,600) |
|
Total Income |
£44,400 |
£46,900 |
£49,400 |
£51,900 |
£54,400 |
|
Tax @ 20% |
£6,357 |
£6,357 |
£6,357 |
£6,357 |
£6,357 |
|
Tax @ 40% |
£5,046 |
£6,046 |
£7,046 |
£8,046 |
£9,046 |
|
Interest Relief @ 20% |
(£500) |
(£1,000) |
(£1,500) |
(£2,000) |
|
|
Total Tax Due |
£11,403 |
£11,903 |
£12,403 |
£12,903 |
£13,403 |
|
Increase in Tax |
£500 |
£500 |
£500 |
£500 |
This example shows a tax increase for the higher rate tax payer.
Methods to avoid increased taxes
- Transfer properties to a limited company (in some cases only)
- Increase rent charged to tenant
- Consider sharing rental income (or other income) with spouse if applicable
- Re-mortgage to obtain best interest rate
- Consider selling some properties (if portfolio held) to reduce borrowings
There are several options available to combat the increased tax bill, however any particular method may not always be suitable to individual circumstances.
Contact us for further information.