Landlords can deduct mortgage interest as an allowable expense against rents, relief is given at the marginal tax rate of the landlord, this means a higher rate taxpayer receive a higher amount of relief than a landlord who is a basic rate taxpayer.Mortgage Interest Relief Changes for Landlords

From April 2017 relief will be restricted to the basic rate of tax, the changes will not affect the tax paid by landlords who are basic rate taxpayers, however for landlords paying tax at higher or additional rate the impact will be huge.

The restriction will be phased in over a 4 year period starting April 2017, in that year 75% of mortgage interest will be fully relieved and 25% restricted to basic rate, the following year this will change to 50% fully relievable and 50% at basic rate, year three sees 25% fully relievable and 75% at the basic rate and year 4 0% fully relieved and 100% at basic rate.

To illustrate how this works, a higher rate landlord with gross rent of £10,000 and mortgage interest of £5,000.

2015/16    (Current year)                             2017/18 (25% @ 20%)                                   2018/19 (50%@20%)

Rents                   £10,000                                    Rents                                  £10,000                      Rents                                £10,000

Interest            -£5,000                                        Interest                                                                     Interest

Taxable             £5,000                                        (£5,000×75%)                       -£3,750                    (£5,000×50%)                 -£2,500

Tax                      £2,000                                      Taxable                                     £6,250                     Taxable                               £7,500         

Tax                                            £2,500                         Tax                                       £3,000

Interest (25%)                                                            Interest (50%)

(£5,000×25%)@20%               -£250                       (£5,000×50%)@20%         -£500

                                                                             Tax payable                         £2,250                    Tax payable                    £2,500

 

The above illustration shows just how quickly tax will esculate on profit for higher rate tax payers, by 21/22 the tax due based on the above will be £3,000 an increase of £1,000 compared to

Interestingly unlike the changes to wear and tear allowance there will not be a consultation with HMRC on these radical proposals.

On the upside if you rent a room in your own home the amount you can receive without tax is set to rise from £4,250 to £7,500 per year from April 2016.