How much of my mortgage interest is tax deductible? (Section 24 tenant tax)


There is a lot of confusion with landlords about Section 24, which is also known as the ‘Tenant Tax’. This legislation was introduce in 2017 and removed a landlord’s right to deduct mortgage interest and other finance costs from their rental income before calculating their tax liability. The introduction of Section 24 has huge consequences for landlords who own their properties individually vs through a limited company. This is because it will put some landlords into a higher tax bracket. But how much of my mortgage interest is tax deductible? Let’s take a look…

How much of my mortgage interest is tax deductible - Can you deduct mortgage interest on a rental property large
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How much of my mortgage interest is tax deductible in brief:

How much mortgage interest is tax deductible as a buy to let landlord is the basic rate of tax percentage. If you’re a basic rate tax payer, this is no different. But if you’re a higher rate tax payer, your tax bill will be higher. The extra charge is the difference between the higher rate of tax and the basic rate.

Can you deduct mortgage interest on a rental property?

Due to the introduction of Section 24 Tax or the Tenant Tax, as of April 2020, you are no longer able to deduct any of your mortgage expenses from rental income to reduce your tax bill.

Instead of a deduction from your rental income, you’ll receive a tax-credit. This tax credit is based on 20% of your mortgage interest payments.

So whether you’re an accidental landlord or had the intention of buying your rental properties, these Section 24 (also known as Tenant Tax) rules will affect you.

How much the rules affect you will depend on the level of rental income you have and how much mortgage interest you pay.

Section 24 of Income Tax Act and what it means for how much mortgage interest is tax deductible

In this Government policy paper described as ‘Restricting finance cost relief for individual landlords‘. They explain who is likely to affected, a general description of the measure and the policy objective. What doesn’t make sense to any normal business person is the policy objective, described as:

To make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years.

UK Government Policy Paper – Restricting finance cost relief for individual landlords

The Government’s idea to make the system fairer is designed to make it fairer between home owners vs landlords. Where home owners don’t get any tax relief for the deduction of mortgage interest.

But then they should need to as they are not providing a service and they are not running a business. Being a landlord and making properties available for tenants is a service akin to running a business.

The UK Government have foolishly made rental businesses the only business in the UK that is not longer able to deduct mortgage interest. They could end up shooting themselves in their own foot, as many landlords provide properties to the government for housing, myself included.

I’m sorry, I didn’t want to make this article into a rant, but I find that I can’t help myself. So instead let’s get to the question at hand, which is “how much of my mortgage interest is tax deductible“?

How much of my mortgage interest is tax deductible – how do the rules of section 24 work?

The Section 24 rules, or how many refer to it as ‘Tenant Tax’, does not mean you can’t get relief at all for mortgage interest.

But instead of getting a full deduction against your rental income, you get relief at the basic rate of tax. This isn’t a problem if you fall completely into the basic rate tax band, but if you are already close to the top of the basic rate band, you could end up paying tax at the higher rate.

Plus for those of you who are in the higher rate tax band already, you’ll end up paying more tax than you did before. Let’s take a look at some examples.

The tenant tax examples we look at in this article include:

  • Accidental landlords with a property they own and didn’t buy with the intention of letting it out.
  • Portfolio landlords with more than one property in their investment portfolio.

Accidental landlords with a property they own and didn’t buy with the intention of letting it out

This first set of examples include accidental landlords. An accidental landlord is someone who has become a landlord by circumstance.

This is where the person has kept a previous property, perhaps because it was difficult to sell at the time, and decided to rent it out rather than to sell it.

According to ‘This is Money‘ around 1 in 14 landlords fall into this category where they didn’t buy the property with the intention of letting it out.

Tax relief on mortgage interest on rented property example #1

  • Landlord has rental income after other associated costs, but before mortgage interest of £8,000 per annum.
  • Their annual mortgage interest is £2,400.
  • This person has other income derived from their day job of £28,000 per annum.
Tax relief on mortgage interest on rented property example #1 calculation
 Tenant Tax (Section 24) RulesPre Tenant Tax Rules
Salary£28,000£28,000
Net taxable rental income£8,000£5,600
____________________
Taxable income£36,000£33,600
____________________
Income tax payable£4,698
Basic rate tax relief on mortgage interest of £2,400 @ 20%(£480)NA
____________________
Total tax liability£4,218£4,218
____________________
These tax calculations are based on the tax year 2020/21. You'll see in this example the new Tenant Tax rules have made no difference to this person's total tax liability.

Tax relief on mortgage interest on rented property example #2

  • Landlord has rental income after other associated costs, but before mortgage interest of £8,000 per annum.
  • Their annual mortgage interest is £2,400.
  • This person has other income derived from their day job of £44,000 per annum.
Tax relief on mortgage interest on rented property example #2 calculation
 Tenant Tax (Section 24) RulesPre Tenant Tax Rules
Salary£44,000£44,000
Net taxable rental income£8,000£5,600
____________________
Taxable income£52,000£49,600
____________________
Income tax payable£8,296£7,418
Basic rate tax relief on mortgage interest of £2,400 @ 20%(£480)NA
____________________
Total tax liability£7,816£7,418
____________________
These tax calculations are based on the tax year 2020/21. You'll see in this example the new Tenant Tax rules has increased this person's total tax liability by £398, as it's pushed him into the 40% higher tax tax band.

Tax relief on mortgage interest on rented property example #3

  • Landlord has rental income after other associated costs, but before mortgage interest of £8,000 per annum.
  • Their annual mortgage interest is £2,400.
  • This person has other income derived from their day job of £60,000 per annum.
Tax relief on mortgage interest on rented property example #3 calculation
 Tenant Tax (Section 24) RulesPre Tenant Tax Rules
Salary£60,000£60,000
Net taxable rental income£8,000£5,600
____________________
Taxable income£68,000£65,600
____________________
Income tax payable£14,696£13,736
Basic rate tax relief on mortgage interest of £2,400 @ 20%(£480)NA
____________________
Total tax liability£14,216£13,736
____________________
These tax calculations are based on the tax year 2020/21. You'll see in this example the new Tenant Tax rules has increased this person's total tax liability by £480, as all the mortgage payments are taxed at the 40% higher tax tax band.

Portfolio landlords with more than one property in their investment portfolio

This second set of examples relates to landlords who have a property portfolio of rental properties. It is this category of landlords where the Section 24 tax change becomes a real problem.

But it’s only a problem if you own the properties in your own name, i.e. not in a limited company, and where the net rental income before mortgage interest relief takes you into the higher rate 40% tax band or higher.

The new rules also affect you if your properties are jointly owned as individuals too. In this case the income will be split between the joint owners.

And where the share of each person’s income breaches the higher rate tax band, this will also increase your tax liability. Let’s take a look at a few examples.

Tax relief on mortgage interest on rented property example #4

  • This portfolio landlord has 10 rental properties.
  • The rental income from these 10 properties after other associated costs, but before mortgage interest of £58,000 per annum.
  • Their annual mortgage interest is £24,000.
  • This person has no other income.
Tax relief on mortgage interest on rented property example #4 calculation
 Tenant Tax (Section 24) RulesPre Tenant Tax Rules
Net taxable rental income£58,000£34,000
____________________
Taxable income£58,000£34,000
____________________
Income tax payable£10,696£4,298
Basic rate tax relief on mortgage interest of £2,400 @ 20%(£4,800)NA
____________________
Total tax liability£5,896£4,298
____________________
These tax calculations are based on the tax year 2020/21. You'll see in this example the new Tenant Tax rules have increased this landlords total tax liability by £1,598.

Tax relief on mortgage interest on rented property example #5

  • This portfolio landlord has 20 rental properties.
  • The rental income from these 20 properties after other associated costs, but before mortgage interest of £144,000 per annum.
  • Their annual mortgage interest is £76,800.
  • This person has no other income.
Tax relief on mortgage interest on rented property example #5 calculation
 Tenant Tax (Section 24) RulesPre Tenant Tax Rules
Net taxable rental income£144,000£67,200
____________________
Taxable income£144,000£67,200
____________________
Income tax payable£50,100£14,376
Basic rate tax relief on mortgage interest of £2,400 @ 20%(£15,360)NA
____________________
Total tax liability£34,740£14,376
____________________
These tax calculations are based on the tax year 2020/21. You'll see in this example the new Tenant Tax rules have increased this landlords total tax liability by £20,364. In this example the landlord owns a reasonably large property portfolio in his own name. As a result the jump in income tax is significant. In fact his tax liability has more than doubled as a result of the Section 24 tax change!

Section 24 landlords selling up – Are buy to let landlords selling up?

As a result of the Tenant Tax or the introduction of the Section 24 tax rules, accidental landlords are forced to sell their property.

Ultimately, and unless these properties are sold to other landlords, this will ultimately reduce the number of rental properties available for rent.

This in turn will increase rents and will ultimately affect the tenants, which is why it’s referred to as tenant tax, as it will end up being the tenants that pay for the tax change in the end, as landlords have to make a profit to make their property business work.

More than half a million ‘accidental landlords’ will need to sell their properties before next April or be hit with new taxes.”

Home Owners Alliance – Accidental landlords ‘have less than a year to sell up before facing new tax bills’

It’s not only mortgage interest that’s disallowed

As explained earlier in this article, the new Section 24 tax rules will restrict relief for mortgage interest on residential properties to the basic rate of Income Tax.

However, it’s not just on mortgage interest, it’s on finance costs as a whole. This new tax rule was introduced gradually from 6 April 2017. It is fully applied in the 2020/21 tax year from 6 April 2020.

Finance costs included by this tax rule include the following:

  • Finance costs includes mortgage interest.
  • Interest on loans to buy furnishings or other items used for your rental property or property portfolio.
  • Fees incurred when taking out or repaying mortgages or loans.

There is not change to the relief is available for capital repayments of a mortgage or loan, which are still not deductible.

I hope this article has helped on how much of my mortgage interest is tax deductible

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