Can You Deduct Mortgage Interest on a Rental Property?

How landlords report their rental income has changed, which means that many now face a higher tax bill and find it harder to make a profit. Here we take a look at how the rules have changed, and explain the answer to the question, “Can you deduct mortgage interest on a rental property?”

How has the mortgage interest tax relief changed?

Prior to 2017, if you were a private landlord, you could take advantage of tax relief by offsetting your mortgage payments. Any interest levied towards your mortgage payments could be deducted from your rental income before paying tax on it.

For example, if you made £8,000 a year in rental income and your annual mortgage interest payment was £6,000, you could deduct this from the rental income, meaning you would only pay tax on £2,000.

However, new rules were introduced in 2017 and phased in to be fully in place by 2020. The phased approach meant that the percentage of mortgage interest payments which could be deducted from landlord rental income was gradually reduced to zero.

Can you deduct mortgage interest on a rental property with the new rules?

If you’re wondering – “can you deduct mortgage interest on a rental property?” the answer since 2020, is no – you cannot.

Under the current rules, landlords must pay a percentage of the total rental income, rather than the income minus the mortgage interest payment.

Continuing with our example used above, under the new rules a landlord who receives £8,000 in rental income a year and pays £6,000 in mortgage interest payments, will now pay tax on the full £8,000 of rental income. That means that, if you’re getting guaranteed rent London for your property in the capital, you’ve got some tax planning to think about.

How can landlords save money to compensate for the mortgage interest rate tax changes?

There are various ways in which landlords can cut back on expenditure and pull back their bottom line that has been challenged by the mortgage interest rate changes. Here are a few ideas:

Set up a business to rent out property

As the changes highlighted here only affect private landlords, you could consider setting up a business that owns rental properties and continue to declare your rental income after deducting the mortgage repayments.

However, this isn’t without risks and other disadvantages. For example, commercial mortgage interest rates are often higher than residential rates, so it may end up costing more than you’d save with the tax relief.

There are also tax implications to consider when transferring property from private to company ownership. You’ll also need to file annual company and tax returns, and pay Corporation Tax on any profit, so there is an extra administrative burden to take into account.

It’s advisable to take professional advice when making any decisions involving your business structure to ensure you are set to make the savings you desire.

Maximise your occupancy rate

One of the biggest ways to save money as a landlord is to avoid losing rental income by keeping costly void periods to a minimum.

There are several things you can do to ensure that your property rents quickly and kept it occupied most of the time.

Sign up for a guaranteed rent scheme

A guaranteed rent scheme removes many of the burdens and costs associated with being a private landlord. Not only does it remove void periods by paying you a monthly rental amount even when your property is untenanted or the tenants are not paying their rent, a rent guarantee scheme could also cover all your maintenance and repair costs, your property management fees, your interim inspection charges, and the costs to return your property to rentable condition at the end of a tenancy.

Rent guarantee schemes also mean you don’t have to worry about sourcing tenants or dealing with all the legal requirements, as this is all taken care of for you.

Can you deduct mortgage interest on a rental property?

The answer is that under the new rules, you unfortunately cannot deduct mortgage interest on a rental property.

If you are a private landlord looking at other ways to save money, then you could consider a guaranteed rent scheme such the one we offer here at City Borough Housing.

Our property management guaranteed rent scheme functions in London as well as parts of Kent and Surrey. It comes with an exclusive service promise and a fully comprehensive, all-inclusive professional property management offering.

Looking to save money as a landlord now that you can no longer deduct mortgage interest on a rental property?

City Borough Housing could have the solution. For your free rental valuation, please get in touch.