Can I Claim Tax Relief on Mortgage Interest

Yes you can currently claim tax relief on mortgage interest.  However as a landlord you should be aware of the changes that are taking place from 6 April 2017 meaning that by 2020 you will not be able to claim tax relief on the mortgage interest you pay but instead will have your tax relief restricted to the basic rate of tax and deducted against tax payable not rental profits.

The History of Claiming Tax Relief on Mortgage Interest

Up until 6 April 2017 landlords were allowed to claim tax relief on all of the mortgage interest they paid on their rental properties, which depending on the level of mortgage involved could represent a substantial reduction in their self assessment tax bills.

However from the 6 April 2017 the Government has introduced changes to try and make property investment less attractive to landlords.  These changes mean that by 2020 Landlords who own rental property with a mortgage and are higher rate (40% or 45%) tax payers could face paying up to double the tax they paid before.  Although some Basic rate tax (20%) payers will be unaffected, others could find themselves pushed into the higher rate of tax.

Whereas mortgage interest was being claimed as a cost against your rental income, the removal of this claim means you could find yourself ‘earning’ more rental income on paper and so falling into a higher tax band without being able to charge more rent.

Changes to Tax Relief on Mortgage Interest

If you are a landlord without a mortgage on your property, then obviously you won’t have been claiming mortgage interest relief, so this won’t affect you.

However, if you do have a mortgage the amount of interest you can claim against your rental income will slowly be reduced over a period of 4 years from April 2017 to 2020. You can work out how much of your mortgage interest you can claim tax relief on as a percentage of what you pay as follows:

Tax Year % Allowable
2017/2018 75%
2018/2019 50%
2019/2020 25%
2020/2021 and beyond 0%

The Landlords Tax Reduction

In order to offer some relief for mortgage interest HMRC is phasing in something new called Landlord Tax Deduction which is being phased in at a similar speed to the phasing out of the mortgage interest tax relief rules to take full affect from 2020.

From 2020 landlords will no longer be able to claim for mortgage interest as an allowable expense and instead will be able to reduce their FINAL tax bill by an amount which is worked as basic rate, currently 20%, multiplied by:

  1. Basic rate of tax (currently 20%) multiplied by mortgage interest, plus any unused mortgage interest brought forward.
  2. Basic rate of tax (currently 20%) multiplied by rental property profits, after deducting any brought forward losses.
  3. Basic rate of tax (currently 20%) multiplied by total income (after all other losses and reliefs but excluding savings and dividends income) that exceeds the personal allowance

This will be phased in and the amount of this deduction you can claim will be restricted as follows:

Tax Year % Allowable
2017/2018 25%
2018/2019 50%
2019/2020 75%
2020/2021 and beyond 100%

Until 2020 landlords must use a combination of the traditional mortgage relief method and the landlord tax reduction, tapered for the percentage allowable.

An Example of Claiming Tax Relief on Mortgage Interest

A landlord has rental profits (rental income less allowable expenses) of £31,000 and has paid mortgage interest of £12,000 so is wondering what tax relief is available.  Here is the landlords tax bill across three different tax years, assuming he is a higher rate tax payer at 40%.

Tax Year 2017/2018
Rental profits  £ 31,000.00
Less: mortgage interest (restricted to 75%)  £ (9,000.00)
Taxable rental profits  £ 22,000.00
Tax Payable  £   8,800.00
Tax Year 2020/2021
Rental profits  £ 31,000.00
Less: mortgage interest (restricted to 0%)  £              –
Taxable rental profits  £ 31,000.00
Tax Due  £ 12,400.00
Landlords Basic Rate Tax Deduction (£12,000 x 20%)  £ (2,400.00)
Tax payable  £ 10,000.00

Thats an increase in tax of £1,200 due to changes in the rules when claiming for mortgage interest relief for two reasons:

  • Mortgage interest relief is restricted to 20%, so if you are a higher rate tax payer you loose your higher rate relief
  • The deduction is from tax payable rather than rental profits, meaning basic rate tax payers could see their rental profits on which the rate of tax they pay is based on jump up.

Landlord Tax Reduction


About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.