Mortgage interest relief changes from April 2017

12th February 2017

Mortgage interest relief changes from April 2017

Many of our Palmers Green and Southgate Landlords are concerned about the changes to Mortgage interest relief coming into effect this April. Local account Alex Chrysostomou explains how these changes will effect landlords and explores the options available to you.

Question: I’m aware that there are changes to the mortgage interest we can claim on our rental income from April 2017, but don’t understand the rules entirely. Are we not allowed to claim mortgage interest relief anymore?

The change to mortgage interest relief was first announced in the 2015 emergency Budget and is known by some as the ‘Section 24 Tax’. Up until April 2017, you can deduct your mortgage interest (plus associated costs like arrangement fees) along with all your other costs before determining your taxable profit.

If we take the following example - £20,000 rental income, £10,000 mortgage interest costs, £2,000 other costs = £8,000 profit

You are taxed on the profit made at your marginal rate — so a basic rate (currently 20%) taxpayer would pay tax of £1,600, a higher rate (currently 40%) taxpayer would pay £3,200, an additional rate (currently 45%) taxpayer would pay £3,600.

By the time the new measures have fully taken effect in April 2020, you will no longer be able to deduct mortgage interest costs from your taxable profits if the property is owned by an individual. (If the property is owned as a company, you continue under the old rules and none of this applies. I spoke about the benefits of owning properties through a company in one of my previous articles).

From April 2020, if you remain within the basic rate tax band, (which will increase to £50,000 at that point), the change in rule won’t impact you. However, for higher rate and additional tax payers, the new rule could potentially have a big impact on your tax liability. Following on from the above example, a higher rate taxpayer will see their tax liability increase from £3,200 to £5,200 and for an additional rate taxpayer from £3,600 to £5,850.

Essentially this change in rule will impact the higher earners and in particular those who are heavily geared. One option to help mitigate this issue is to set up a company and sell the properties to it – although this will trigger a stamp duty liability and potential capital gains tax. Another option may be to sell the less profitable properties that you own.

If you require more advice on how the recent changes will impact your tax position, feel free to get in touch or visit my website

Tony Ourris Director at Anthony Webb says "I predict that the Palmers Green property market will remain stable throughout 2017 despite Brexit, affordability is pushing out Londoners to the suburbs and, with our excellent transport links, Palmers Green is a popular destination. Towards the end of last year there was an uplift in the number of rental properties available as investors had rushed to acquire property before the new stamp duty tax came into effect. This saw a stabilisation of rents locally. However the rental market remains strong and demand is high particularity for one and two bedroom apartments. If you are thinking about becoming a landlord or own a property that you are considering letting out please talk to a member of our team. They are trained in all the latest legislation and you can feel confident that your property is in safe hands."