How much can I claim for on tax relief for mortgage interest payments?

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    How much can I claim for on tax relief for mortgage interest payments?

    Hi all, new landlord here. I recently left my house to go and live with my parents, my house is now rented out earning £850 a month. I paid 180k for the house and spent just under 20k doing a full refurbishment - it's worth about 230k now. I have no mortgage on this property and am currently saving to buy a second property with a buy to let mortgage.

    When I buy this second property, let's say for £150,000 with a 25% deposit of £37,500 - that leaves me paying £500 mortgage on the house. Let's say I rent the property for £600 a month. I'm a 20% rate tax payer. How much mortgage interest relief can I claim? Can I deduct the full monthly £500 mortgage cost from my tax bill? Meaning that in 12 months I earn £7200 from rent, I can deduct £6000 for mortgage from my tax bill? Or is it only the mortgage interest that I can deduct, and if so, how much would that be for a 5% mortgage for example.

    Currently you deduct the mortgage interest (and other qualifying costs) from your rental income, and add that to any other income and calculate the income tax you should have paid (deducting any that you have already paid in PAYE).

    In a few years time (after a transitional period) you will add your rental income less qualifying costs to any other income and calculate the income tax due.
    You would then deduct 20% of the interest cost (assuming the base rate of tax is still 20%) and deduct any what you have already paid in PAYE.

    That change is important if it changes you to be a higher rate tax payer.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).


      Currently there is no tax relief on mortgage payments. Rather mortgage payments are treated as an expense. You deduct your expenses from your property income to determine your profit and you are then taxed on that.
      So you would deduct £6000 (plus any other expenses) from £7200. Then add the £1200 profit to you other income and if you are still a basic rate tax payer you would pay £240 tax.

      With the posposed change you would add £7200 to you income and if you were still a basic rate tax payer you would be liable to £1440 tax from which you could get a reduction of 20% of your mortgage payments - £1200 - leaving you to pay the same £240 tax.

      However if the £7200 would be enough to put you into the higher rate you would pay more.

      Sorry the above assumes an interest only mortgage, since only mortgage interest can be claimed.


        What if I have a repayment mortgage? I buy a house for £150,000 with a 25% deposit on a buy to let mortgage and am left paying back £500 per month over 20 years, after which I will fully own the property with no mortgage. As soon as I buy the house I let it out for £550 a month, so £6600 a year. I am paying £5000 a year for the mortgage and also incur another £1600 of costs from letting agent fees, gas certificate etc. That means I make 0 profit each year on this property because the rent gives me £6600, and I spend all £6600, perhaps even more than £6600, leaving me with a net loss that year, having to use some of my own money to cover it.

        How much tax would I pay, if any?


          I have a second question about this, which might make it easier to reply to. If I have a repayment mortgage of £100,000 at 4% interest rate. Does that mean I can deduct expenses of £4000 each year from my tax bill?


            The interest you pay is an allowable expense.

            Your example is too simplistic, you don't pay £4,000 interest on a £100,000 repayment mortgage at 4%, do you?

            What you do is get a mortgage, pay what you pay, then each year you ask your Lender for an interest statement, they send you this and you use that figure as an allowable expense.


              You can only deduct the interest, and in future you will only get tax relief on the interest.



                I looked up a mortgage online for repayment mortgages and one had me paying a total interest of £49,000 over the 20 year period for a £110,000 loan. If you were to average out the interest equally to each year that works out to £2500 a year in interest. I know it won't be averaged out like that but that's basically all I'd get in terms of tax relief each year, £2500 (on average) ?


                  Exactly, it doesn't work like that... so what's the point of averaging?


                    Your payment, theoretically, remains the same but the interest portion is front-loaded, right? Amortisation eventually leads to the point where interest is a mere fraction of the payment, rather than the bulk of it.

                    Is this making sense? As I say, all you need is an interest statement.


                      Yep makes sense. Thanks for the help.


                        I have a further question guys, I think I know the answer, but confirmation would be helpful.

                        If I am a basic rate tax payer, earning less than £42,000 a year, does that mean the new changes to mortgage relief for higher rate taxes payers won't impact negatively on me at all? So getting into buy to let now using interest only mortgages is still a very good investment for a basic rate tax payer such as myself?

                        Hmm, thinking about it, with the new method I will enter into the higher tax threshhold more easily right? I had a plan that with my current 10k rental income from a house that I own outright, plus 15k salary, I could earn another £17000 before i reach the higher tax threshhold of 42k. With the current system I could have bought 5 two bedroom houses with interest only mortgage payments of £4k per year and rented them out for 7k per year, and had an actual taxable income of perhaps only 3-4k per year per property. 15k taxable income from that plus my 10k other rent and 15k salary is only 40k and thus keeps me below the 42k threshhold for higher rate tax.

                        With the new system, I'll go well into the higher threshhold with this plan won't I? I'd have 7000 taxable income per house, over 5 houses that is 35k. Plus 10k added from rents from my fully owned house and 15k from my salary, takes me to 60k taxable income. Of which I'd only get 20% of the mortgage interest payments of 4k per year removed from my tax bill? Just £800 per house for the 5 interest only 2 bed houses?

                        Doesn't this mean I am worst off with the new system, it makes me a higher rate tax payer?


                          Yes it does - spot on.
                          Being a higher rate tax payer affects the CGT and dividend tax rate you pay as well.

                          Your plan of two properties bringing in 7k and costing 4k seems a little optimistic.
                          Don't forget to factor in higher interest rates going forward.
                          When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                          Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).


                            Here's a further question someone might know the answer to. Let's say I don't want to be a higher rate tax payer but am close to the theshhold. If a new property I purchased is only in my name, can I allow my partner to be the landlady of the property and receive all rent money as her own salary, thus saving us money on tax because she is still a basic rate tax payer and would only pay 20%, whereas if I received the rents I would have to pay 40%. Is this allowed?


                              If interest rates rise, how much would it likely impact on a typical £350 monthly payment on an interest only mortgage? What might you expect the payment to rise to?


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