What will the reduction in mortgage interest relief mean for my tax returns?

One of the biggest taxation breaks enjoyed by private landlords is mortgage tax relief. Or rather it was. The financial advantages which came with buy to let mortgages collectively saved landlords a lot of income tax over the years. Something which didn't go unnoticed by HMRC.

How mortgage tax relief worked

The way mortgage tax relief worked was very beneficial to landlords. They only paid tax on the net profits after mortgage interest (and expenses) was deducted from rental income. And because most buy to let landlords held interest only mortgages the savings were considerable.

But in 2017 the system changed. Leaving most private landlords facing substantially higher tax bills. This is because the new system means landlords can no longer deduct their mortgage payments from their rental income. Instead a tax credit will replace mortgage relief. But this will be worth less to most landlords.

But there is some good news. HMRC are gradually phasing in the changes to mortgage tax relief. It will be 2020 before it’s fully replaced.

How the end of mortgage tax relief will affect your tax return

The last year saw private landlords able to claim 75% of their mortgage relief. This year (2018/19) it's 50% and for the 2019/20 tax year it's only 25%.

This gradual decline in relief will obviously have a significant impact on your tax return. And in how much you finally have to pay HMRC.

What happens in 2020?

From April 2020 you can no longer claim mortgage tax relief. Instead you will be able to claim a 20% tax credit. In other words, you receive back 20% of the interest you’ve paid. But all your rental income becomes taxable.

To calculate your tax credit, you add up all the interest you've paid over the financial year and multiply by 20%. That's the amount of tax credit you'll receive. As an example, and to keep things simple, if you pay £5,000 interest, you'll a tax credit of £1,000.

But exactly how this change will impact on your tax liability depends on your tax bracket. And of course, how much profit you're left with after deducting expenses. But it's inevitable many landlords will face higher tax demands.

Don't leave money on the table

With the probability rather than the possibility of higher tax bills it's more important than ever to make sure you claim for every expense you can. GoSimple Tax report many people who submit a self-assessment tax return are not claiming all the expenses they’re entitled too. This means the average person is overpaying income tax by £355. That’s a sizeable chunk of change.

Ensure you include all your deductible expenses on your tax return. Or, if you use an accountant, make sure you give them all the information they need to complete an accurate return. The money you’ll save on expenses will offset some of that lost by the reduction in mortgage tax relief.

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