Mortgage Interest Relief and £1000 Property Allowance

Robster88

Hello, 

I have a question which I hope someone can help me with. I know that basic rate taxpayers can get a 20% tax relief on the interest on mortgages for a buy to let property. I also know that there is the option to deduct the £1000 property allowance from rental income, or if expenses are more than £1000, to claim expenses instead of the allowance to reduce the profit figure. 

I'm trying to work out how both those things affect the total tax bill.

Let's say a basic rate tax payer earns £10,000 annually in rental income, all of which is above the tax free threshold, and so is taxed at 20%. My understanding is that mortgage interest can no longer be classed as an expense, so let's say other expenses came to £900, and so they claimed the £1000 property allowance. Let's say interest on mortgage payments amounted to £3,000, and so would result in a tax credit of £600. What would the total tax bill be in this scenario? 

Would it be £10,000 (rental income) - £1000 (property allowance) = £9000. 20% of £9,000 is £1,800. Then £1,800 minus the £600 tax credit for a total of £1,200, or am I misunderstanding? 

Thanks.. 

Jeremy535897

You can't claim the property allowance if you claim the tax reducer on mortgage interest:
https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income#cannot

Robster88

Thanks. So in the above scenario, would the tax liability be as follows instead, or am I still making a mistake somewhere? 

£10,000 (rental income) - £900 in allowable expenses = £9,100. 20% of that is £1,820. Then the £600 tax credit is taken from that for a total of £1,220? 

I appreciate the difference is very small in this case, however I suppose would be bigger if you didn't have any other allowable expenses (in that case the total bill would be £1,400). 

[Deleted User]

Robster88 said:

Thanks. So in the above scenario, would the tax liability be as follows instead, or am I still making a mistake somewhere? 

£10,000 (rental income) - £900 in allowable expenses = £9,100. 20% of that is £1,820. Then the £600 tax credit is taken from that for a total of £1,220? 

I appreciate the difference is very small in this case, however I suppose would be bigger if you didn't have any other allowable expenses (in that case the total bill would be £1,400). 

That is correct!