The mortgage interest restriction limits the tax relief that landlords can claim on their expenses of owning a buy-to-let property. As of the beginning of the 2017 tax year, landlords could no longer claim their mortgage interest on buy-to-let properties as a claimable expense to reduce their tax obligations. They now have the ability to claim a flat 20% tax credit. This is 20% of the interest they pay on their mortgage. The scheme was introduced to avoid landlords with very high incomes being able to claim their interest rates and significantly reduce their Income Tax payments – thus making the system more equitable.
In practice, the mortgage interest restriction only actually affects landlords who are higher rate tax payers, as they used to be able to get back 40% or even more of their mortgage interest. If you are a basic rate taxpayer, nothing has changed for you, so no need to fret! You were getting 20% of your mortgage interest back before – now it’s exactly the same, under a new name!
If you own multiple buy-to-let properties, it may be more tax-efficient for you to run your rental business as a limited company, as this still enables you to claim the interest back in the same way as you did before the change.
We understand that renting out a property can sound simple enough, until it comes to the finances and paperwork! Contact our team today for comprehensive guidance and support to get your accounts in order and ready for your Self Assessment tax return.