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.
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.