Ever decreasing mortgage interest relief……

The booming property rental market has, in recent years, attracted many contractors who have invested hard their earned money into property portfolios as an alternative means of providing a pension or just to give an additional income stream.

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When many of these investments were made, full relief was available on any mortgage interest incurred but from April 2017 things changed and this relief has decreased ever since.  Mortgage interest relief will be restricted to basic rate (20%) income tax from 2020/21.

We have already seen two years of restrictions:-

  • Tax year 2017/18 – 75% of mortgage interest was fully allowable and the remaining 25% available at the basic rate;
  • Tax year 2018/19 – 50% of mortgage interest was fully allowable and the remaining 50% available at the basic rate;

And now we are entering the final phase with further reductions in the next two tax years.

  •  Tax year 2019/20 – 25% of mortgage interest will be fully allowable and the remaining 75% available at the basic rate; and
  • Tax year 2020/21 – mortgage interest deduction will only be given at the basic rate.

So contractors with property portfolio’s will see less of that extra income!!

Does this apply to you?

Well if you own rental properties personally rather than through a Limited company and the property is not a ‘furnished holiday let’ or commercial in nature then yes this affects you and your tax bill.

Whether you are a basic rate or higher rate tax payer there is a high chance these changing rules will impact your overall liability. From tax year 20/21 mortgage interest costs will be completely disallowed in computing rental profits and instead a tax credit equal to 20% of the interest will be given against your income tax liability. As the interest cost is completely disallowed, it means you will have higher overall taxable income. This could push you into a higher rate of income tax (40% / 45%), reduce your personal allowance and possibly affect your entitlement to child benefit.

If these changes marginally nudge you into being a higher rate tax payer there may be ways to reduce your taxable income. There are options to carry back pension contributions or Gift Aid donations from the next year.  Your accountant should be able to guide you through this if you are a client of Orange Genie Accountancy we will work with you to look at the impact of the new rules.

What do the numbers look like?

John owns a number of residential buy- to-let properties and has no other income. His annual rental income is £60,000 per annum and he has mortgages on the property which incur annual interest charges of £25,000. John’s tax position based on this income for the five tax years in question is as follows:-

                 
     

2016/17

2017/18

2018/19

2019/20

2020/21

 
     

100%

75%

50%

25%

   
                 

Rental Income

 

60,000

60,000

60,000

60,000

60,000

 

Loan interest

 

(25,000)

(18,750)

(12,500)

(6,250)

0

 

Net rental income

 

35,000

41,250

47,500

53,750

60,000

 
                 

Less personal allowance

(11,000)

(11,500)

(11,850)

(12,500)

(12,500)

 
     

 

 

 

 

 

 
                 

Taxable income

 

24,000

29,750

35,650

41,250

47,500

 
                 
                 

Income tax payable

 

4,800

5,950

7360

9000

11500

 
                 

20% credit for interest cost

0

(1,250)

(2,500)

(3,750)

(5,000)

 
                 

Total income tax payable

4,800

4,700

4,860

5,250

6,500

 
                 

Net profit after tax

 

30,200

30,300

30,140

29,750

28,500

 
                 
                 

 

If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com

 

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