Understanding Landlord Tax Relief on Mortgage Interest Changes

Investing in property has long been a popular avenue for individuals for wealth creation. The rental income from the properties is a substantial portion of their earnings for many landlords. However, there have been significant changes in recent years that affect you as a landlord. Particularly, regarding the landlord tax relief on mortgage interest. Let’s take a look at what you need to know!

What is buy-to-let mortgage interest tax relief?

Buy-to-let mortgage interest tax relief has historically been a crucial factor for landlords in the UK. Basically, it allowed you to deduct the mortgage interest payment from their rental income. Therefore, reducing your taxable income and resulting in lower tax payments. This was a huge relief for landlords who had large amounts of mortgage interest payments. As it decreased their overall tax burden. 

What is Landlord mortgage interest tax relief in 2022-23?

As of the 2020-21 tax year, the landlord mortgage interest tax relief has changed significantly. The changes were implemented gradually over several years and are now fully in effect. Landlords can no longer deduct their mortgage interest payments as an expense when calculating their taxable rental income. Instead, a tax credit, known as the “property finance cost relief,” has been introduced. This credit is set at 20% of the mortgage interest payment and is applied directly to the landlord’s tax liability.

How does the buy-to-let tax relief affect landlords?

The change from the traditional mortgage interest deduction where you could deduct the entire mortgage payment to the property finance cost relief and the changes implemented has a significant impact on you as a landlord. The 20% tax credit, while applicable to all landlords, regardless of their tax bracket, may result in higher tax liabilities for those who were previously benefiting from higher-rate tax relief on mortgage interest payments. It can impact your profitability as a landlord, especially if you have a high mortgage interest obligation. 

What are the changes in mortgage interest tax relief?

The process of transitioning from the traditional mortgage interest deduction to the new tax credit has been phased in since the 2017-18 tax year. The percentage of mortgage interest deductible as an expense steadily decreased, while the tax credit percentage simultaneously increased. Landlords should be aware that, starting from the 2020-21 tax year, the tax credit has reached its full 20% implementation. This means that landlords can no longer claim mortgage interest payments as an expense; instead, they must calculate their tax liability by factoring in the property finance cost relief.


So even if you are a high-rate taxpayer, you will now only get a tax credit at the basic rate of 20%.

These changes are something you need to be aware of and make an informed decision. While property investment can still be a profitable avenue for wealth generation, it is vital to have a clear grasp on the tax aspects. Reach out to one of our tax accountants and book a consultation today to get your queries resolved. 

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