Mortgage Interest on Residential Property – how much to deduct in 2020?

Mortgage Interest on Residential Property – how much to deduct in 2020?

The allowable deduction for mortgage interest on residential property is phasing out over four years (between 2018-2021). In 2020 you are allowed to deduct 25% of your mortgage interest to arrive at property income. By 2021, the allowable deduction will be 0%. This means that heavily-geared properties, owned by an individual at a rate higher than the basic rate (20%) are adversely affected.

The worked examples below assume rental income of £10,000 and mortgage interest of £3,000.

Basic rate taxpayers (20%)

If you are an individual who pays tax at the 20% marginal rate the tax liability is £1,400. People often like to see how the liability compares to the treatment prior to the law being introduced. You can see there is no difference in tax liability, £1,400. The individual at the 20% marginal rate is therefore not affected.

2019/20 Pre-law
£ £
Property Income (W1) 9,250 7,000
Tax @ 20% 1,850 1,400
Less: tax reduction for interest (W2) (450) 0
Tax liability 1,400 1,400
Workings
W1
Rental Income (before interest) 10,000 10,000
Less: relief for interest (3,000 x 25%) (750) (3,000)
Property income 9,250 7,000
W2
Tax reduction
£3,000 x 75%  = 2,250 @ 20% 450 0

Higher rate taxpayers (40%)

If you are an individual at the 40% marginal rate the tax liability is £3,250. Compare this with a tax liability of £2,800 under treatment pre-law. The individual at the 40% marginal rate is worse-off by £450 under the introduction of the new law.

Interest on Commercial Property and Furnished Holiday Lets

Mortgage interest is wholly deductible for these properties.

Contact us

If you want to discuss your situation, contact us at Sadler Advisory.