Tax relief changes to mortgage interest on property income – what do they mean?

The third phase of the restriction of tax relief on mortgage interest takes effect in this new tax year 2019/20, the ultimate aim being to restrict the available relief to the basic rate.

The restriction on finance costs such as mortgage interest means that since 6 April 2017 it has not been possible to deduct 100% of these expenses to work out taxable property profits, as would have been the case in tax years preceding that date. The implementation of the restriction has been introduced on a sliding scale and will affect all individual landlords with finance costs.

What are the new restrictions?

For 2019/2020 the fully deductible costs are now restricted to 25% of the interest paid and the balance of 75% obtains relief by way of a 20% deduction from the taxpayer’s tax bill.

As an example, if Mortgage interest of £25,000 is paid by the property landlord, £6,250 (25% x £25,000) is deductible in full as an expense, leaving the balance of £18,750 @ 20% = £3,750 to be deducted from the taxpayer’s ultimate tax bill.

From April 2020 the scale will change again to push all of the finance costs to be taken as a deduction from the overall tax bill and there will be no element of full relief available at all.

Impact on buy-to-let properties

These changes impact on all landlords with borrowings but perhaps more significantly for those with rental properties where overall the taxpayer does not have a tax liability leaving unrelieved amounts rolling forward. Those with brought forward rental losses may also find it difficult to obtain relief as the losses must be set against the rental profits first. This further reduces taxable income and the resulting tax liability and as such the availability for tax relief is reduced also.

Get in touch

If you need further help in dealing with these changes, please get in touch with the Tax Department.