Major changes have been made to mortgage deductions and other financial interest for individuals from April 2020/21.

Individuals are no longer allowed to deduct mortgage expenses as an expense when preparing their rental accounts.

These changes do not affect properties that are owned by corporate bodies.

This change was made 4 years ago and is being gradually applied.

The changes made to deductions of mortgage payments

The mortgage expenses would now be disallowed but the taxpayer will have tax reducer applied to their mortgage expenses.

So, what does that mean to the landlord, I would like to illustrate with the example below.

Example of application of tax reducer

Jane is a landlord with rental income of £10,000 every tax year..

 Jane’s mortgage expenses are £8000 and so her rental income (what she has earned from the property) is therefore £2000.

She also pays tax at 20% in her main job (she is a basic taxpayer).

Previously Jane would have been able to deduct the £8000 as an expense for the property business.

 Thereby, the taxes payable by Jane would be £400.

With the changes made applicable, Jane will not be able to deduct the mortgage expenses.

This would make the tax payable to be £2000 rather than £400. (20% of £10,000).

However, Jane will be able to claim a tax reducer on the mortgage payment

This will be 20% of £8000(£1600) of the mortgage’s expenses.

The £1600 will reduce the tax payable to £400 which is what she would have paid initially.

What happens if Jane pays tax at 40%?

If Jane were paying tax at 40%, her tax paid under the old rules would have been £800(40% of £2,000) based on our illustration above.

But under the new rules she will only be allowed relief at 20% of the mortgage expenses therefore the tax payable now is:

Rental income                                     £10,000

Tax payable @ 40%                           = £4,000

Less tax reducer   20% of £8000       =£1,600

 Tax payable                                        =£2,400

So, the taxpayers that would be affected by these changes are those that pay tax at the higher and additional rate (40% and 45%).

 Conclusion on mortgage deductions.

Thanks for reading this blog, if you are a landlord of residential property in the UK and would like to have more support with your business or perhaps need more advice, you can contact me, I would be happy to support you with your property business.