From 6 April 2017 mortgage interest is no longer fully deductible as an expense against property income.
Gradually over the next four years the amount of interest deducted against income is reducing and instead relief is obtained at 20% as a deduction from tax.
The relevant percentages are:
|Deductible against income||75%||50%||25%||0%|
|Deduction at 20% against tax||25%||50%||75%||100%|
So how will this look in practice?
If we assume rental income of £90,000 from a portfolio of properties, expenses of £15,000, mortgage interest of £35,000 and that the tax payer is in the higher rate (40%) tax bracket before property income.
|Net property income||48750||57500||66250||75000|
|tax at 40%||19500||23000||26500||30000|
|Less: mortgage interest relief||-1750||-3500||-5250||-7000|
What if you are on the threshold between the basic rate and higher rate tax?
If your income, including net property income is high enough to fall into the 40% tax bracket then even though you were a basic rate tax payer under the old rules you may find yourself taxed at 40% on part of your income and only able to offset the mortgage interest relief at 20%.
What can you do?
Make sure you keep a record of all your expenses and claim for everything
If you can control some of your other income, for example dividend income then make sure you reduce your dividends to stay below the 40% tax threshold.