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The current rules (up until April 2016) allow landlords to deduct all associated costs from their rental income, to determine their taxable profit.
The new rules allow landlords to deduct all costs except their mortgage interest payments to determine their taxable profit. Instead, landlords will be able to claim a basic rate allowance of 20% of interest payments, regardless of their individual marginal tax rate.
It is worth noting the following facts:
Rental income of 15,000
Mortgage interest cost of 8,000
Other costs of 2,000
Taxable income is rental minus all costs = 15,000 – 10,000 = 5,000
A higher-rate (40%) taxpayer pays 40% of 5,000 = £2,000
A basic-rate (20%) taxpayer pays 20% of 5,000 = £1,000
Taxable income is rental minus all costs except mortage interest = 15,000 – 2,000 = 13,000
A higher-rate taxpayer pays 40% of 13,000, minus basic-rate allowance of 20% of 8,000 interest (1,600) = £3,600
A basic-rate taxpayer pays 20% of 13,000, minus basic-rate allowance of 20% of 8,000 interest (1,600) = £1,000
Note that the basic-rate taxpayer is unaffected for tax payable on this property, but remember their total taxable income is £8,000 higher – this could push them over the higher-rate threshold
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