Are there any second mortgage tax benefits? 

If you have a second property, you could be slashing your tax bill with a new government scheme. We discuss the details and what this scheme has replaced throughout this guide! 

What are second mortgage tax benefits?

Landlords could once claim mortgage interest payments as tax-deductible on buy-to-let properties. These payments were seen as an expense in generating a rental income and could be used to reduce rental income profits and therefore tax owed on those yearly profits. For basic rate taxpayers, this would save them 20% on their total mortgage interest payments.

It has never been possible to deduct mortgage payments on your primary residence or on any second property that is not functioning as a rental, such as a holiday home you use exclusively and occasionally. In these circumstances, there are no second home and second mortgage tax benefits. 

Are second mortgages tax-deductible?

In the past, it was possible for landlords to deduct the interest payments on buy-to-let mortgages as expenses in their annual tax returns. This loophole allowing part of their second mortgage payments as tax-deductible was closed in April 2020. However, landlords now have access to Landlord Mortgage Interest Tax Relief. 

What is Landlord Mortgage Interest Tax Relief?

Instead of being allowed to deduct buy-to-let mortgage interest payments as tax-deductible to decrease your tax liability, landlords have access to a tax credit system called Landlord Mortgage Interest Tax Relief. 

Landlord Mortgage Interest Tax Relief provides all UK landlords with a 20% tax credit based on the amount of mortgage interest they have paid within each tax year. Thus, it is equivalent to the older rules for landlords who pay tax at the basic rate of 20%. However, it means wealthier landlords who pay tax at the higher 40% rate are losing out compared to the old system. 

Are tax credits bad for landlords?

The change to a tax credit system means landlords who pay the higher rate of tax can no longer claim deductions on second mortgage interest payments, and they are not able to access tax credits because they only pay at the 20% rate. The bottom line is that higher rate taxpayers who are landlords will be paying more tax from their rental income than before. 

Is there a loophole back to the loophole?

The previous loophole to claim mortgage interest payment deductions may have been closed, but there may be a way back to it for some. The new changes only apply to private landlords, which is anyone that rents their property out as an individual or a couple if jointly owned. It does not apply to registered businesses that are used as vehicles to rent out single or multiple properties. 

It is possible to set up a limited company to operate your rental property or properties. The business would still be allowed to claim mortgage interest deductions on the business’s buy-to-let mortgages. 

Is it worth setting up a property rental business?

Even though you can still deduct interest mortgage payments if operating through a business, it is not likely to be worth incorporating for this reason alone. Creating a property rental business to manage your rental property portfolio should be heavily researched to fully understand the benefits and drawbacks. 

There are multiple costs associated with incorporating that can far outweigh any financial gain from being allowed to continue mortgage interest deduction in your taxes. For example:

  1. Mortgage interest rates are higher for businesses than they are for private landlords
  2. You might need to go through a costly process of switching mortgage
  3. You might need to pay additional legal costs
  4. Transferring the property from your name to the business will incur Stamp Duty again
  5. You’ll then need to deal with corporation tax and pay yourself dividends. Overall taxes will be more complex and will almost certainly need an accountant, even if you never used one previously. 

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About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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