Avoid the mortgage interest trap
Historically, Landlords have been able to offset rent income with mortgage interest as a cost. This has often been the difference between a ‘profit for tax’ and a ‘loss on your Self Assessment Return’.
Due to Government changes however, Mortgage Interest is not now treated the same for Self Employed landlords as it is for Corporate landlords, in other words, unless you hold your property within a Limited Company you cannot now claim all of your Mortgage Interest against your rental income.
If you have personal rental income not held within a Limited Company you should be aware of the changes to the treatment of Mortgage interest costs against your Self Assessment Tax Return.
Also If you are considering holding your property within a Registered business, please see my article on how best to own your property.
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What are the Changes to Mortgage Interest Allowances?
Since 2017 this allowance of cost against income has been reduced gradually. In the 2017 – 2018 tax year you could only claim 75% of the mortgage interest against the income, in the 2018 – 2019 year it was 50% allowable, and the last year that you could claim any of it as an allowable cost was 25% in the 2020-2021 tax year.
As you can see up until the 2018 tax year, you could utilise all of your Mortgage interest costs against your rental income when calculating your tax, and as many small property landlords were renting out property in order to help pay the mortgage, this made sense. With the new rules however, you could be making a loss – with the rental income being less than the mortgage costs, but having to pay tax on this anyway, as the mortgage interest is disallowed.
The changes in the mortgage interest rules mean that even if you have a high mortgage against your rental property, as the graph above shows, these costs do not count in the same way they once did.
It is worth noting that this should not be news to most landlords, who will have been filing their Self Assessment Tax returns over the last few years, the issue arises when the small landlord, who only rented the house / flat out to cover their mortgage hasn’t been filing a return, because they have only made a loss.
As any Accountant or bookkeeper will tell you, you have to declare the income on your rental business, even if you made a loss in the year, however all too often I hear ‘But I only have one property and I don’t make any money on it’. Sadly the HMRC are not interested in this argument, and want the tax they consider is due.
All is Not Lost!
This all sounds like bad news, but all is not lost, there are things we can do:-
Previous Losses Are Still Declarable
Not only should you declare your losses in any tax year, it is in your interest to do so, especially now, as the losses you made in previous years can be carried forward and used in current and future years to mitigate the ‘profits’ you may be showing under the new rules.
You may have to trawl through years worth of bank statements and old receipts, but it is still worth declaring them, not just because it is the rules, but also because it is in your interest!
Now that you cannot claim the mortgage interest against your Self Assessed rental income, it is worth accounting for any previous rental losses so that you can carry them forward and use them now.
The mortgage interest can still be used – as a Tax Reducer
A Tax Reducer does not eliminate tax altogether, but it does increase the lower tax rate, so that only the basic rate of tax is paid relating to finance costs.
This means it works in the same way as your private pension costs, as tax reducer for higher rate taxpayers.
As you may be aware, if you pay into a private pension plan, and are a higher rate taxpayer, the amount you pay into the pension reduces the tax down to the lower rate for that amount pension paid.
Unused Mortgage interest works in the same way, so if you have rental and other income and part of your tax bill falls into the higher rate tax bracket, the amount of mortgage interest that you could not claim against your rental income can be used to reduce the rest of your tax, so that it come down to the basic rate of tax.
As per our example:
So can I declare previous years Rental Income?
Another question I often get asked, is ‘I have not filed a Self Assessment Return before, do I have to go back over the life of my rental property?’
The short answer is yes, and it is not as hard as you may think. The HMRC currently have in place the ‘Let property Campaign’ to help small landlords to get their tax affairs in order.
The Let Property Campaign is there to help taxpayers declare both their income and costs relating to their rental properties. This includes jointly held properties, as well as holiday lettings, and homes rented for part of the year when the owner is away.
It is not available for commercial lettings or garage / lock up rentals, so it is worth reading more on what is and is not covered.
Remember you should declare the income even if you have made an overall loss on the costs.
If you have any questions relating to this, or any of our other articles, please do not hesitate to contact us, we are here to help or assist in any way.
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