Mortgage interest deduction in future on rental for basic tax payer.. please help!

annoye

Ok so I've been reading bits every now and then about the restriction on mortgage interest on rental income... But everytime I think I understand it... I confuse myself!! And then most scenarios people use, they talk about the higher tax brackets... NOT the 20 percent tax brackets. So can someone please tell me once and for all how this will actually affect a normal 20percent tax person....

There are 2 scenarios that a friend (also a landlord) and I have ..... and you can appear to read it either way and find either one of us correct based on which wording of it you read....

So the way I see it... is for example you make ....

10k rental income
5k interest on mortgage
1k other expenses.

currently that's 4k profit..... 20 percent on 4k =800 tax bill

In 2020 (forget about the years in between I want to try keep this simple) it's....

10k rental income
5k interest (non deductible)
1k

so that means 9k profit.... 20 percent of 9k = 1800 tax bill..... HOWEVER you can claim 20percent relief on finances that are not deductible from profit... so you can claim 20percent of 5k (1k) back... 1800 - 1000= 800 tax bill

so you are no worse off (forget about the higher profit pushing you over into the higher tax brackets etc... like I said I want it simple)


My friend however reads it as....

10k income
5k interest
1k profit

so 9k profit... but you can claim 20 percent of the interest as a relief... so claim back 20 percent of 5k which is 1k.... 9k - 1k means 8k profit... so you have to pay 20percent tax on 8k = 1600 tax bill.

Please can someone clear this up once and for all and state if either of us are right... and if not.. how will it work????

booksurr

annoye wrote: »

And then most scenarios people use, they talk about the higher tax brackets... NOT the 20 percent tax brackets.

because it only affects people in the higher rate tax bracket.

let us go back to basics...
Old system
rental income - eligible costs (eg mortgage interest) = net profit
net profit + all other sources of (taxable) income - personal allowance = total taxable income
tax payable on taxable income: up to the first £32,000 @ 20%, then anything over 32k @ 40% ( i will ignore the 45% rate because if you have that sort of income you have no place asking for free advice and should be able to work this out yourself)

2020 onwards
mortgage interest is no longer an eligible cost, it is then technically a "tax reducer". That means you calculate your taxable income, calculate how much tax you are liable for on the income and then reduce the amount of tax you actually pay by the value of the tax "reducer"

so your reading is correct and your friend could not be more wrong. As you correctly show, tax due is 1,800 less the tax reducer of 1000 means the basic rate taxpayer is in exactly the same position as he was under the old system 1800 - 1000 = 800

However, it may push some people into the higher rate bracket for the first time because, as you show in your example, taxable rental income will be 9k rather than 4k under the old system. That extra 5k of taxable income may be enough to push someone over the higher rate threshold at which point they would only get a tax reduction of 20% (£800) yet would be taxed at 40%.

i am surprised you and your friend have not read the .Gov guidance on this as the info is there for anyone to find
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

saajan_12

annoye wrote: »

My friend however reads it as....

10k income
5k interest
1k profit (do you mean other expenses?)

so 9k profit... but you can claim 20 percent of the interest as a relief... so claim back 20 percent of 5k which is 1k (correct this is a reduction on tax).... 9k - 1k means 8k profit (no, the £1k was a REDUCTION in tax, and has already been 'multiplied by 20%', no reason to subtract from profit. The 8k figure is meaningless.) ... so you have to pay 20percent tax on 8k = 1600 tax bill.

You have to be careful with income/outgoings/profit and tax payable/refundable separately.
Rent: Income = 10k Tax = £2k
Other Expenses: Outgoings = -1k Tax = £-0.2k
Taxable Profit: Profit = 9k Tax = £1.8k
Interest: Outgoings = 5k Tax = £-1k

Total:Net Income = 4k Tax = £0.8k

annoye

thanks for the help guys... and yes saajan the "1k profit" I meant other expenses. cheers