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Changes to mortgage interest relief on rental properties

Changes to mortgage interest relief on rental...

I have been researching the changes to mortgage interest relief for rental properties in order to advise my clients of the implications. I have a couple of queries which I would be very grateful if anyone could answer.

1) My client is a director of a small company. He takes a small salary (approx £8k). He also has a small profit (approx £6k) from his rental properties, so pays 20% tax on the part of his rental profit which falls into the basic rate band, and 0% on the part which is covered by his personal allowance. The rest of his income from the company is taken as dividends, which are taxed partly in the basic rate band and partly in the higher rate band.

My question is this - even though he is a higher rate taxpayer by virtue of his dividend income, will he be unaffected by the proposed rental income changes because he will still be entitled to the 20% tax relief on mortgage interest, which will offset any tax paid in the basic rate band on this interest? I assume that where the profit profit falls into the personal allowance and is untaxed, there will be no further relief available.

2) Another client is in full time employment and is a top rate taxpayer. He also has one buy to let property, which currently makes a small loss. If mortgage interest was not taken into account, it would make a profit. I am struggling to determine from the legislation as to when the mortgage interest deduction will be "capped" at the maximum of rental profits excluding interest. My apologies, I don't think I have phrased this part of the question very well, but I have been left rather confused by a Tolleys seminar on the proposed changes, which included a worked example for 2016-17 which capped the mortgage interest deduction at a maximum of the overall property profit, so that the property business could not be in a loss-making position simply by virtue of the mortgage interest deduction.

Thank you for any assistance on the above.

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27th Feb 2016 09:35

The mortgage interest (depending on the year)

is not allowed as a deduction from profits, so will increase income generally at the higher rate. Relief is given as a 20% reduction from the tax liability.

1) will have a larger profit from the property, increased HR chargeable & then 20% deduction from the tax as calculated.

2) will similarly now have a profit on the letting liable at the higher rate & then 20% deduction from the tax as calculated.

That is once we're are fully into the changes and there is no relief from profits. It's messier in the intervening years to get there

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