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Mortgage interest tax relief changes

From 6th April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. The changes will be phased in from April 2017, as the table below shows.

Tax relief on finance cost 2016/17 2017/18 2018/19 2019/20 2020/21
Existing system 100% 75% 50% 25%
New system 25% 50% 75% 100%

How will this affect landlords?

  • Higher rate tax payers income will be reduced as they will only receive a 20% reduction in mortgage interest tax relief, instead of the current 40%.
  • Landlords with a rental income which only just covers their buy to let mortgage payments may find the reduction in mortgage interest relief makes their investment no longer profitable.
  • Some taxpayers may move into a higher tax band as they will now need to pay tax on their liabilities and not just their profit.

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