Most landlords are probably now aware of the restriction to tax relief on mortgage interest and how it affects higher rate taxpayers. However, I’m afraid there’s more bad news! Not only do the changes potentially increase tax liabilities of higher rate tax payers but they may also affect child benefit payments!
Under new rules being phased in from 2017/18 rental profit is calculated before deducting mortgage interest and this figure is used by HMRC to calculate total income. The tax liability is initially calculated based on this total income and only then is 20% of mortgage interest deducted. So rental profits are shown in your tax calculation before any mortgage interest is deducted!
For example, in 2016-2017 someone earning £45,000 salary, £10,000 rental income and paying £7,000 mortgage interest would have a total income less mortgage interest of £48,000. As child benefit reduces proportionately for income between £50,000 and £60,000 they would receive the maximum amount based on individual family circumstances.
However, under the new rules mortgage interest is not deducted in calculating total income. As a result total income of £55,000 will be used by HMRC to calculate child benefit entitlement, resulting in a loss of half of the child benefit entitlement.
The only consolation is that the new rules are being phased in gradually so at least we have until 2020/2021 before we feel the full extent of the changes!