If you’re currently letting out a property with a mortgage - or thinking about doing this - there was an important income tax change in 2017 which you need to be aware of.
Please note, this change applied to residential lettings only; different tax rules apply for commercial and furnished holiday lets.
In the 2016/17 tax year, when calculating your taxable income you could continue to deduct most costs from rental income. Allowable costs include mortgage interest, but exclude capital costs such as improvements and any capital repayment element of your mortgage payments.
This changed from 6 April 2017. The new rules take full effect from 6 April 2020, but since 6 April 2017 the changes have been phased in by 25% a year until 2020/21 with a mix of the old and new rules used when calculating your taxable income and tax liability.
Under the new rules, you can no longer deduct finance costs (such as mortgage interest, mortgage arrangement fees, interest on loans to purchase furnishings) from rental income when calculating your taxable income. Instead, you'll get the basic rate (currently 20%) deduction of these costs from your tax liability.
This may mean some of your income moves into a higher tax band, as your taxable income could increase. Further information on these upcoming changes can be found on GOV.UK.
No information on this site should be taken as tax advice. For advice you should consult with an independent tax adviser.