Reform of Mortgage Interest Relief - Are you affected?

5 years, 5 months ago by Oliver Atkinson

Reform of Mortgage Interest Relief - Are you affected?

Reform of Mortgage Interest Relief - Are you affected?

The rules until April 2017

For tax returns up to and including 5th April 2017, finance costs (including interest) on buy to let mortgages were a fully allowable expense when calculating taxable rental profits.

The new rules

Over the next 3 years this allowable expense is gradually being phased out so that by April 2020 finance costs will no longer be deductible from rental
profits if the property is owned by an individual.

Instead, landlords will be required to make an adjustment in their tax return to get a basic rate tax deduction of up to 20% of the finance cost after the rental
profits have been taxed.

The change is being phased in as follows:

The changes can be seen in the following example:

Although the lower rate taxpayer has the same tax to pay, their profit has increased from £4,000 to £9,000, which could mean they become a higher rate taxpayer.

What can be done?
The new rules only affect properties owned by individuals so the ownership could be transferred to a company, although this will have CGT and Stamp Duty
implications.