Expats could face higher taxes following loss of mortgage interest rate relief

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Mortgage & Finance News

Jan 09

The emergency budget of April 2015 was a bit of a shock, effectively phasing out mortgage interest rate relief from April this year over the next three years. As an expat with UK property, up until now you will have been able to offset your mortgage interest against your income tax. The new rules mean you no longer will and could end up having to pay more tax on your profit.


Expat Interest Rate Relief

To put it in simple terms here is an example of how it could affect you:

Before April 2017

Rental income: £10,000
Mortgage interest costs deducted: £5,000
Other costs deducted: £1,000
Total Profit: £4,000

You would pay tax on that £4,000 based on your personal rate. A basic rate taxpayer would pay 20% (£800) and a higher rate taxpayer would pay 40% (£1600). An additional rate taxpayer would pay 45% (£1,800).

After April 2020

Rental income: £10,000
£5,000 mortgage interest costs NOT deducted: £0
Other costs deducted: £1,000
Total Profit: £9,000

This would now equate to a tax bill of £1600 for a basic rate taxpayer and £3600 for a higher rate taxpayer – a huge leap and not great news for your profits.

However, it isn’t quite as dire as that because everyone will be allowed to claim a basic rate deduction of 20% from their mortgage interest costs which on £5,000 would be £1,000.

It means a basic rate taxpayer would pay £800, so no different from the rules before but a higher rate taxpayer would pay £2,600 which is more than before April 2017.

What’s the big deal if I’m a basic rate taxpayer? Surely, there’s no real change?

On the face of it, it looks like you won’t see much of a change in what you pay and for many that will be the case. However, the new rules change the way income is calculated. Going by the examples above, your income from rent is calculated as £4,000 in 2017 but £9,000 in 2020. Depending on any other income, it could push you into the higher rate tax. For example, if you earn £38,000 the added £4,000 of rental income would take you to £42,000, under the 40% tax threshold of £43,001. However, in 2020 you would have to add £9,000 taking you over the threshold to £45,000 and meaning you’d have to pay higher rate tax on part of your income even though your income and circumstances hadn’t changed.

As an expat this may or may not be an issue, it all depends on what other income you have in the UK. If you’re working abroad and paid in a different currency in that country, then it might not be a problem though you may have to pay tax in the country you live in. However, if you receive your income in the UK (e.g. UK pension, you own a UK-based business, UK investment income) then you could fall foul of the new rules.