Landlord tax reduction

Landlord Mortgage Interest Relief is phasing out from 6 April 2017 to be replaced by a new tax relief called the Landlord Tax Reduction. The phasing in and out of the two reliefs will take place from 6 April 2017 to 6 April 2020.

Landlord Mortgage Interest Relief

Until 6 April 2017 Landlords were allowed to deduct all the mortgage interest that they paid as an allowable expenses against their rental profits.  From 6 April 2017 this is being phased out over the course of 4 years meaning that the percentage of mortgage interest a landlord can claim as an allowable expense will be reduced until it is zero.  Here are the percentage amounts of mortgage interest that a landlord can claim against their rental profits from 2017 to 2020:

Tax Year % Allowable
2017/2018 75%
2018/2019 50%
2019/2020 25%
2020/2021 and beyond 0%

An Example of Claiming Landlord Mortgage Interest Relief

It is the tax year 2019/2020 and a landlord makes rental profits of £30,000.  The landlord has paid mortgage interest of £4,000 and is therefore able to claim for tax relief of 25% of the mortgage interest paid.  Therefore the landlord rental profits become £29,000.

Landlord Tax Reduction

In order to offer Landlords some mortgage interest relief a new relief is being phased in at a similar speed to the old one being phased out called the Landlord Tax Reduction.  This offers landlords relief on their final tax bill at the basic rate of tax calculated at at the lower of the following 3 checks:

  1. Basic rate of tax (currently 20%) multiplied by mortgage interest, plus any unused mortgage interest brought forward.
  2. Basic rate of tax (currently 20%) multiplied by rental property profits, after deducting any brought forward losses.
  3. Basic rate of tax (currently 20%) multiplied by total income (after all other losses and reliefs but excluding savings and dividends income) that exceeds the personal allowance

The tax reduction can’t be used to create a tax refund.

The phasing in for the new Landlord Tax Reduction is as follows:

Tax Year % Allowable
2017/2018 25%
2018/2019 50%
2019/2020 75%
2020/2021 and beyond 100%

Until 2020 landlords must use a combination of the traditional mortgage relief method and the landlord tax reduction, tapered for the percentage allowable.

An Example of the Landlord Tax Reduction

During 2020/2021 a landlord had a gross salary of £36,000, rental income of £20,000, allowable landlord expenses of £7,000 and mortgage interest of £15,000.  Here is an example of how to work out the Landlords tax bill, using the current tax rates:

Tax year 2020 to 2021
Gross Salary  £  36,000
Property income calculation:
Rental income  £ 20,000
Allowable costs (excluding mortgage interest)  £(7,000)
Property profits  £  13,000
Total income  £  49,000
Income Tax Calculation
£11,850 x 0%  £        –
£34,500 x 20%  £  6,900
£2,650x 40%  £  1,060
 £    7,960
Landlord Tax Reduction (see below)  £   (2,600)
Final Tax Bill  £    5,360

The landlords tax reduction is calculated as 20% of the lower of the following:

  1. Mortgage Interest £15,000 x 20% = £3,000
  2. Rental Property Profits £13,000 x 20% = £2,600
  3. Adjusted income over personal allowance £49,000 – £11,850 x 20% = £7,430

The Impact of the Landlord Tax Reduction

The changes to the way landlords get mortgage interest relief have been met much negativity.  Landlords can now find themselves pushed from basic rate tax (20%) to higher rate tax (40%).

The change means that a landlord will need to calculate their tax due on a higher figure since the adjustment for mortgage interest relief is made against a landlords final tax bill.  This has seen many basic rate tax payers finding themselves paying higher rates of tax but not collecting anymore rent, particularly harsh on accidental landlords.

For landlords who have built up a portfolio of properties that they treat as a business, then the new Landlord Tax Reduction rules move them further away from being treated like other businesses are given the restriction on how they can treat their financing costs.

What to Do About The Mortgage Interest Tax Relief Changes

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.