You are taxed on £20,000 and you keep £5,000
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Mortgage interest is not a deduction. You pay tax on rent less running costs, then get 20 per cent of the interest back against the bill.
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What the finance cost restriction actually costs you, and whether your tax bill has passed your profit.
Why the number surprises people
Interest stopped being a deduction on 6 April 2020. You are taxed on rent less running costs, with the interest ignored, and then given a basic rate reduction against the tax.
The reduction is 20 per cent of the lowest of three amounts: your finance costs, your property profits, and your adjusted total income. It is not simply 20 per cent of the interest, and anything unused carries forward.
A basic rate landlord is unaffected, because 20 per cent of the interest is what the deduction was worth anyway. It is higher rate landlords who pay, and the more you borrow the worse it is.
Companies are not restricted at all. Interest stays a deduction for them, which is the whole of the incorporation argument.
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The same calculation in Excel, including the carry forward and the comparison with the pre-2017 treatment.
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