UK residential landlord tax self assessment : mortgage interest cost

[Emkay]

A UK acquaintance advised me that this is sometimes incorrectly entered after change of rules from ca. 2021/22…. maybe @GaryC can kindly confirm? . I can see from my last year’s assessment that this looked to be the case although my income less other expenses were way below taxable threshold.

For any UK landlord of residential property (not holiday let), the TOTAL amount of mortgage interest only needs to be entered into box 44 (paper/postal version) of property income/expenses. The assessment will then automatically calculate 20% of this total amount to offset against income.

Seemingly, there was a recent year where one was instructed to only enter 20% of the mortgage interest payment on the tax return. Some Google results still state that only 20% of mortgage interest should be entered into the tax return though the tax return notes don’t say this. Doing this incorrectly could be costly given the major mortgage increases for many over the last year.

[GaryC]

I think the rule-change you are referring to is the restriction on relief for mortgage etc interest costs, which was phased in over 4 years.

From 2017/18 you are no longer allowed to deduct your full interest payments in calculating your rental profits. Instead, you are given a tax reduction in your self assessment, equal to tax at the basic rate of 20% of the interest that is now prohibited as a deduction in calculating your profits. This gradually removed relief for interest at your marginal tax rate over that 4-year period. During the phasing-in period you claimed a deduction for some of the interest and received a tax reduction for the rest.

From 2020/21 interest is no longer an allowable deduction against rental income. Instead, you enter the amount of interest in box 44. Your tax is then calculated on your rental profit excluding any deduction for the interest and an amount equal to 20% of amount in box 44 is used to reduce your net tax due.

The background and transitional period is here - https://www.gov.uk/guidance/changes-to- ... se-studies - but as far as I can see the tax return guidance has not changed since 2020/21.

[Emkay]

I think the rule-change you are referring to is the restriction on relief for mortgage etc interest costs, which was phased in over 4 years.

From 2017/18 you are no longer allowed to deduct your full interest payments in calculating your rental profits. Instead, you are given a tax reduction in your self assessment, equal to tax at the basic rate of 20% of the interest that is now prohibited as a deduction in calculating your profits. This gradually removed relief for interest at your marginal tax rate over that 4-year period. During the phasing-in period you claimed a deduction for some of the interest and received a tax reduction for the rest.

From 2020/21 interest is no longer an allowable deduction against rental income. Instead, you enter the amount of interest in box 44. Your tax is then calculated on your rental profit excluding any deduction for the interest and an amount equal to 20% of amount in box 44 is used to reduce your net tax due.

The background and transitional period is here - https://www.gov.uk/guidance/changes-to- ... se-studies - but as far as I can see the tax return guidance has not changed since 2020/21.

Thank you for clarifying Gary . So what I was told by my acquaintance wasn’t wrong as such, just not fully explained? His point was to make sure the full amount of interest is entered into box 44 rather than a pre calculated reduction so that the assessment calculates accordingly.

[GaryC]

Yes, there does seem to be a lot of false information out there. A quick search found one page called "5 mistakes landlords make on their Self Assessment Tax Return" by a firm claiming to be property investment accountants.

They go on to say, "When completing your SATR, it’s important to make sure you include only 20% of the mortgage interest in box 44 on your tax return..."

Compare this to an HMRC response on its customer forum, where they confirm the correct treatment, "You should enter the total amount finance costs in box 44."

Most search hits seem to tell people the right way to do it but still some rogues out there.