Are the rules for claiming mortgage interest on rental properties changing?

Martin Copland

Question: I have a small portfolio of three rental properties that supplement my employment income.

I have mortgages on these properties so the profit I make on them is fairly small. I have heard that the rules for claiming mortgage interest on rental properties is changing and I assume this will affect me. Can you explain the new rules?

Mrs W - Bexhill

Answer:

From the current tax year (2017/18), the amount of interest relief that can be claimed against rental profits is changing. In previous tax years, the interest amount was allowed as an expense against rental income and therefore full relief was effectively given at your marginal tax rate. In future, the interest charge will be restricted to the basic rate (currently 20%). For 2017/18, only 25% of interest is treated in this way, but this increases by 25% over the following tax years, so that by 2020/21 all of the interest relief is restricted to basic rate.

If and how this will affect you will depend on your other income and the amount of interest that you are claiming.

You do not give details of your employment income, but if you are a higher rate taxpayer this is likely affect you. The changing rules may cause you to pay tax at the higher rate even if you would not do so under the current rules.

By way of an example - if you had £15,000 of rental income (before interest but after other expenses) and £10,000 of interest, with employment income of £40,000 you would have an additional £2,000 of tax due a year.

Advice:

I suggest that you contact an accountant to determine what affect the new rules will have on your personal position. You can then decide if you wish to make any changes in order to mitigate the tax increases.

Ashdown Hurrey can advise on this matter in addition to other tax, accountancy and business matters. Contact Martin Copland on 01424 720222 or email him at martinc@ashdownhurrey.co.uk.

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