Mortgage interest used to be allowed to set off against rental income. Starting from 2017-2018 financial year, government gradually remove private landlord’s right to treat mortgage interest as expense. From 2020-2021 financial year, 0% of interest can be treated as expense. The landlords can only claim 20% tax relief of the interest paid.
This is a big blow to many professional landlords whose income is in the band of 40% income tax rate. Recent leap of mortgage interest and cost of living crisis magnified this cost burden. A small private landlord created a petition to call for reinstatement of mortgage interest tax relief. The petition drew lots of support and signatures: https://petition.parliament.uk/petitions/627785. The petition is open until 10 May 2023.
Today, HM Treasury responded in the petition. The response is, with no surprise, official and boring:
The Government recognises that the private rented sector plays an important role in the UK housing market and economy. However, the Government also has a responsibility to make sure that the income tax system is fair. Under the old system, residential landlords got relief on their finance costs (including mortgage interest payments) at their marginal rate of income tax, which meant that higher rate taxpayers got a more generous tax relief than those on lower incomes.
To address this, and make sure that all residential landlords are treated the same by the income tax system, the Government phased in a set of reforms to restrict finance cost relief to the equivalent of the basic rate of income tax. The reforms mean that all residential landlords will now receive the same amount of relief. It also reduces the disparity in income tax treatment between homeowners and landlords.
To minimise the impact on landlords who are affected, the Government chose to act in a proportionate and gradual way. It announced this change almost two years before its implementation. The restriction, introduced in April 2017, was phased in over four years to give landlords time to adjust to the changes.
To be clear, these reforms do not mean that tax relief on mortgage interest has been abolished. Landlords are still able to claim an income tax reduction equivalent to basic rate tax relief on the finance costs of their rental property. Residential landlords also continue to be able to claim relief at their marginal rate of income tax on the day-to-day costs incurred in letting out a property, such as letting agent fees and replacing furniture.
The Government understands that people, including those who rent property, are worried about the cost of living challenges ahead. That’s why decisive action has been taken to support households across the UK, whilst remaining fiscally responsible.
The response only says one thing, that is the tax rule change is driven by fairness, that higher earner should not be treated more generously.
We disagree with this view. This change is overreaching. Higher earners are already paying 40% or 45% tax on their higher band of income. Rental income is not special but a type of income. Another layer of tax burden on this part of income is not fair indeed.