How to Avoid The New Tax Rules on Mortgage Interest

November 21, 2015

Get some expert advice from our specialist tax accountants in Leeds and find out how to legally get around some nasty new government rules.

In July 2015, the government announced new tax rules that have massive ramifications for property purchases. The hardest hit will be self-employed landlords: those who make their living off buying and selling or buying and letting.

The announcement caught even the most agile-minded finance experts a bit off-guard. The new rules are some of the most complex changes made in a summer budget statement. After some time pouring over the media commentary and the details on these new mortgage interest changes, our tax accountants from Leeds think we’ve got the whole thing sussed.

So what is this new tax law?

What is the New Tax Rule Affecting Mortgage Interest?

Let’s start by saying that if you bought property for the pure enjoyment of having a roof over your head, you needn’t worry about such tax laws. This change to mortgage interest doesn’t affect personal affairs, only business.

Currently, individuals who buy property for the sake of reselling are able to claim mortgage interest as an expense. For example:

You have £20,000 rental profit and £6000 mortgage interest costs. You can claim that £6000 against the £20,000, meaning you have made a taxable profit of £14,000.

However, under the new system, which comes into action April 2017, amounts claimable on mortgage interest will change. The changes will be incremental, adjusting each year until, by 2020, you will no longer be able to claim any mortgage interest as untaxable earnings.

So, if you have £20,000 rental profit and £6000 mortgage interest, your profit is still £20,000. Not only are you paying that mortgage interest, you are now paying tax on it, too. This increased profit may also mean that basic-rate taxpayers under the current system are pushed up into the higher-rate tax system, resulting in you having to pay the taxman even more.


The only solace here is that you can still claim basic-rate deductions on your mortgage interest, which is 20%. On that £6000, you can continue to claim £2400. Better than nothing.

Understandably, this new system has got plenty of landlords fuming. The additional costs of this new tax hike will see many lose thousands in previously safe cash.

But it doesn’t have to be that way.

How Our Tax Accountants in Leeds Can Help You Avoid The Changes

Note the careful use of the word ‘individuals’ in this blog. Individual, self-employed property owners who work as a sole trader will see the full force of the new changes to mortgage interest tax arriving in April 2017.

However, businesses won’t.

If you want to avoid the extra charges incurred by the mortgage tax changes, consider setting your landlord business up as a limited company. While a limited company comes with increased admin tasks and a few other niggling responsibilities, the benefits of starting one vastly outweigh the downsides.

Here are the main benefits of buying property through a limited company:

  • The tax relief available on mortgage interest is unchanged for limited companies, meaning if you made £20,000 and paid £6000 in mortgage interest post-2017, you’d still be able to claim £6000 in expenses.
  • Corporation tax is 20%. Therefore, if you are a higher or additional tax-rate payer, you will save money on rental income by earning it through an LTD.
  • If you are a trading company that is registered for VAT, you can claim VAT expenses on repairs and other costs.
  • When the time comes to sell a property, you can claim an indexation allowance, allowing you to reduce tax payable on your profits.

Need helping setting up your limited company to avoid the hefty new tax affecting landlords? Get in touch with Russell Smith Chartered Accountants today. Our expert tax accountants in Leeds can help get your new LTD business up and running.

0113 337 2130

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