Tax relief still exists on mortgage interest, just in a different way to before!
Prior to April 2020, finance costs on residential property for individual landlords (such as mortgage interest), was deemed to be a tax-deductible expense for tax purposes by HMRC.
However, since April 2020, this has changed. The changes have made it so that the finance costs incurred by individual landlords are no longer deductible in arriving at the rental profits for the tax year. Instead, an adjustment is made to provide relief in the tax calculation, restricted to the basic rate of income tax (20%). Making it less beneficial now, than it used to be, to those earning above the basic rate band.
For clarity, finance costs include mortgage interest, any payments that are equivalent to interest, and incidental costs of obtaining finance, such as fees and commissions, legal expenses for negotiating to draft loan agreements, or valuation fees required to provide security for a loan.
Who is impacted?
These rules only apply to individuals with residential property businesses (sole trades and partnerships). They do not apply to companies. They do not apply to land and property dealing or development businesses, commercial lettings or Furnished Holiday Lets.Â
Practical considerations
The increase in taxable rental profits, without the deduction for interest costs, can lead to an increase in your total income for tax. This can have knock-on effects which depends on your personal circumstances, other income, capital gains and other reliefs. For example, if you or your partner claim child benefit and the change increases your income above £50,000; child benefit can be clawed back under the High Income Child Benefit Charge (See our thoughts on this here: High Income Child Benefit Charge)
Conclusion
If you’re unsure how you can obtain relief for your mortgage interest or other finance costs in relation to a rental property, or you’d like to understand how these changes have impacted your tax return in the past few years, please get in touch.
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