Landlord blog: here to help you understand the implications of the phasing out of mortgage interest relief

The government's decision to phase out mortgage interest relief on buy to let properties has been a hot topic in the press since it was announced back in July 2016. However, with few articles out there offering a contextual insight, few Landlords are actually able to fully understand what this exactly means to them from a financial perspective.

As such, we have asked our tax advisors, GC Accountants, to help us shed some light on the subject.

NOTE: Please note that whilst we have given some approximate case studies below, the detailed financial implications will vary according to your personal financial status and income level. As such, you should seek specific advice on this matter based on your exact personal circumstances.

Tax Insights- some hypothetical case studies

We have applied calculations using two separate income situations:

Landlord A

Property Value £350,000 - Mortgage £200,000 - Interest 5% - Rental Income £18,000 pa

Landlord B

Property Value £550,000 - Mortgage £350,000 - Interest 5% - Rental Income £25,000 pa

Landlord C

Property Value £800,000 - Mortgage £450,000 - Interest 5% - Rental Income £35,000 pa

a) Where the sum of the tax-payer’s rental income less expenses, other than mortgage interest, together with all other taxable income is below the sum of the personal allowances and the basic rate band of tax. ie, for 2017/18, below £45,000.

b) Where the above sum is greater than, for 2017/18, £45,000.

Firstly, we will look at the position at the time when the changes fully take place, 2020/2021 using the current personal allowances and tax bands.

Scenario 1: Landlord A: Rental Income £18,000 pa

a) Income Situation (a)

There will be no change to the amount of tax payable. Under both the old rules and the new rules, the tax charge will be £400.

b) Income situation (b)

Under the old rules the tax liability would have been £800. Under the new rules the liability will be £2,800.

Scenario 2: Landlord B: Rental Income £25,000 pa

a) Income Situation (a)

There will be no change to the amount of tax payable. Under both the old rules and the new rules, there will be a loss or credit carried forward to be used in future years.

b) Income situation (b)

Under the old rules there would have no tax liability and there would have been losses available to carry forward. Under the new rules the liability will be £3,300.

Scenario 3: Landlord C: Rental Income £35,000 pa

a) Income Situation (a)

There will be no change to the amount of tax payable. Under both the old rules and the new rules, the tax charge will be £100.

b) Income situation (b)

Under the old rules the tax liability would have been £200. Under the new rules the liability will be £4,700.

The tax position for the intervening years, 2017/18 to 2019/20 under (a) is that there will be no change. Under situation (b) the increase for those years will be:

Scenario 1. 2017/18 £1,300: 2018/2019 £1,800: and 2019/20 £2,300.

Scenario 2. 2017/18 £675: 2018/2019 £1,550: and 2019/20 £2,425.

Scenario 3. 2017/18 £1,325: 2018/2019 £2,450: and 2019/20 £3,575.

These examples were provided by Harry Charalambou, a senior partner at GC Accountants, and are provided merely as an example. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken by GC Accountants or Base Property Specialists Limited for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing. You should contact your accountant, or a member of GCA, to understand your specific liabilities before going forward. You can visit the GC Accountants website here.

GC Accountants are a Chartered certified accountancy firm & are registered auditors located in Norh London.