Changing Mortgage Interest Tax Relief

In the past, homeowners had a big benefit: they could reduce their mortgage costs from their rental income, which cut their tax bills. This tax relief was especially helpful for people who paid taxes at a higher rate. For example, people who paid taxes at 40% on their mortgage payments got an exemption. It was a major reason for people to invest in real estate.

But since April 2020, a new system has changed the way owners report their rental income for tax purposes in a big way. Under the new rules, landlords can no longer directly reduce their mortgage costs from their renting income. Instead, they get a tax return equal to 20% of the interest they pay on their debt. As a result, this change has made it much harder for homeowners, especially those in higher tax bands, to save money on taxes.

The changeover to the new system notably affects higher or extra-rate taxpayers. At their highest tax rate, they are no longer qualified to get a deduction for taxes on their mortgage payments. As a result of having to disclose the income used to pay the mortgage on their tax returns, landlords can discover that they have to fall into higher tax bands. It is really important to consider all sources of income, including salaries and pensions, to determine whether landlords are subject to higher or additional rate tax brackets.

Calculating Tax Liabilities

Let’s look at some examples to understand better how these changes will affect things. Let’s say an owner gets £950 in rent each month and spends £600 on mortgage interest. Under the old method, higher-rate taxpayers would have had 40% of their mortgage payments taken off their taxes. But under the new method, landlords get a 20% tax return on the interest they pay on their mortgages. People with higher tax rates may pay twice as much as they will have under the old rules.

Let’s look at Sarah, a homeowner. She makes £1,500 a month from renting out her property and pays £800 in mortgage interest. Under the old system, Sarah would have saved 40% on her mortgage payments because she paid taxes at a higher rate. It would have made quite a big difference in how much she had to pay in taxes. But under the new system, Sarah now gets a 20% tax return on the interest she pays on her mortgage.

Under the new rules, Sarah will have to pay taxes on her full $1,500-a-month rental income. After considering the tax credit, she can get back 20% of her mortgage interest payments, or £160 per month (£800 x 20%). So, Sarah’s total tax bill will be more than it was under the old method. Instead of getting a 40% tax cut, she will now have to pay more taxes on the money she gets from renting out her property.

Now, let’s look at John, a different owner. He gets £2,500 monthly from his tenants and pays £1,200 monthly in debt interest. John would have saved 40% on his mortgage payments if he had been a higher-rate taxpayer under the old scheme. It would have greatly affected how much taxes he had to pay. But under the new method, John can get a 20% tax refund on the interest he pays on his mortgage.

Under the new rules, John will have to pay taxes on his full £2,500-a-month rental income. After taking note of the tax credit, he can get back 20% of his mortgage interest payments, totaling £240 per month (£1,200 x 20%). Even though John still gets some tax relief, the total effect is not as good as it was under the old scheme. His rental income will now cost him more in taxes than before.

As a result of these changes, some landlords are thinking about turning their rental homes into a company so they can keep getting tax benefits for their mortgage interest. By turning their property into a business, owners can continue to deduct mortgage interest from their renting income. But a choice like this needs to be thought through carefully. Our highly expert tax professionals can help you deal with it. Most business borrowing rates are higher than those offered to private homeowners, which could make the tax savings null and void. Also, moving property ownership to a business costs an extra round of stamp duty, and incorporating makes tax returns more complicated. Landlords would have to pay company tax on their gains and get a lower tax rate on their income as a reward. We offer professional help to save your money and maximize your profit.

Changes to the tax refund for mortgage interest on buy-to-let mortgages will greatly affect landlords. The available tax benefit has decreased since people stopped deducting mortgage costs and started getting a 20% tax credit on mortgage interest payments. It is especially true for people who pay taxes at a higher rate. When deciding whether or not to incorporate, landlords must carefully weigh the pros and cons, such as higher mortgage rates, more stamp duty, and more complicated tax forms. As tax laws change, landlords need to stay up-to-date and get our professional help to make good financial choices.

Benefits and Requirements of Holiday Lets

Converting rental properties into holiday lets is another option some property owners consider for their investment properties. Holiday lets are treated as companies, and, as a result, their owners are eligible for tax benefits related to the interest they pay on their mortgages. However, several prerequisites and standards must be satisfied for the property to be suitable for use as a professionally furnished holiday let. Landlords who are interested in transforming their properties might benefit in various ways by offering holiday lets, including the following:

Benefits

1. Tax Relief: One important benefit of running a property as a holiday let is that landlords may keep their mortgage interest tax deduction. Mortgage interest expenses for holiday lets can be deducted from rental revenue, in contrast to the modifications that apply to traditional buy-to-let houses.
2. Usage Flexibility: With holiday lettings, landlords can utilize their property for personal getaways when not rented out. It enables them to use the property for enjoyment while making money during the busiest vacation seasons.
3. Possibility of Higher Rental Income: Compared to long-term residential rentals, holiday lets frequently attract higher rental prices. It implies that by focusing on tourists or seasonal visitors, landlords may be able to increase the revenue from their properties.
4. Off-Peak Availability: Landlords may use the property for personal use or provide short-term rentals to travelers looking for weekend getaways or special events during off-peak times when it is unoccupied, or demand is low.

Requirements:

1. Commercial Furnished Holiday Letting: A house must meet certain standards to qualify for the tax benefits of holiday lets. The house must meet certain quality standards in the UK or EU and qualify as a commercially equipped vacation rental. These terms can be about the furniture, the services offered, and whether or not the property can be used for business.
2. Minimum Usage Requirements: Holiday lets have minimum usage requirements. The property must be open for rent at least a certain number of days each year (e.g., 105 days), and people can only stay there for a certain time (e.g., 31 days). The property must be open for business use for certain days each year (for example, 210 days). It is in addition to the minimum usage standards. It ensures that the owner doesn’t just use the property but can still be rented out.

3. Quality and Maintenance Standards: Vacation rentals should meet certain standards so guests can be comfy and have a good time. To draw tourists, landlords must ensure the property is well-kept, clean, and has enough furniture.

If a landlord wants to turn their property into a holiday let, they should carefully look at the requirements and see if their property meets them. They should also consider the location’s weather, the demand for short-term rentals, and the costs of running a holiday property. We offer expert advice from our tax professionals, who know how to handle properties and assist you in making smart choices and getting the most out of holiday lets.

Adapting to Changing Mortgage Interest Tax Relief

There have been many changes to how mortgage interest tax relief works for landlords. It used to have a lot of tax benefits, but new changes have taken away some of those benefits for private owners. Limited companies and holiday lets may be other ways for owners to keep some tax reliefs, but the costs and benefits of these choices need to be carefully thought out and researched. As always, it’s best to talk to a professional from our team to make good financial choices in this changing tax situation. If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.