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By Darren Perry, Head of Second Charge Mortgages

More clients are exploring the second charge mortgage avenue to help pay their tax bills and prevent HMRC proceedings.


We have recently passed another tax deadline day, which means many of your clients will have a significant tax bill to pay and some may have to find a way of raising the money to meet their HM Revenue & Customs commitments.


Fortunately, it is possible to use a second charge mortgage to raise funds to pay a tax bill. There are players willing to lend money for this purpose as long as they are happy about the reason why the client did not have provisions in place to pay the bill and are confident they are able to pay future bills.


More and more clients are exploring the use of a second charge mortgage to pay a tax bill and prevent proceedings by HMRC. This could be because HMRC stopped accepting payment of tax bills by credit cards on 13 January last year, leaving mortgages the preferred option for those who do not have the capital ready to clear the bill.


There are, however, some considerations. First, it is best practice that people address their HMRC tax matters sooner rather than later. It is also important they maintain a dialogue with HMRC, as this is the best way to resolve any issues.


Many landlords are also now looking to second charge mortgages to meet the increased costs associated with owning buy-to-let property.


Changes to the income tax treatment of buy-to-let may have been announced some time ago but the financial impact of these changes is only just starting to hit landlords in the pocket.


Tax returns for 2017/18 submitted for the end of the January 2019 deadline are the first to include the staggered removal of mortgage interest tax relief on rental income.


Consequently, many of those returns will result in a larger-than-expected bill. For those, a second charge mortgage may provide the solution.


Landlord mortgage interest tax relief explained

Prior to 2017, landlords would only pay income tax on their net rental income, or profits, which meant they could deduct any mortgage interest payments from their taxable income as well as any other expenses incurred throughout the year.


As most landlords choose to take an interest-only buy-to-let mortgage, it meant they were able to write off all their mortgage costs. So, for a landlord charging £950 per month rental income, with mortgage interest payments of £600 per month, the situation worked liked this:

  • Annual rental income = £11,400
  • Annual mortgage interest = £7,200
  • Taxable income is £11,400 – £7,200 = £4,200
  • A basic-rate taxpayer would pay £840 in tax
  • A higher-rate taxpayer would pay £1,680 in tax


However, since April 2017, tax relief on mortgage interest has been tapered until it will be completely removed in 2020. The tapering is:

  • In the 2017/18 tax year, landlords can claim 75 per cent of their mortgage tax relief
  • In the 2018/19 tax year, landlords can claim 50 per cent of their mortgage tax relief
  • In the 2019/20 tax year, landlords can claim 25 per cent of their mortgage tax relief


So, from April 2020, landlords will no longer be able to deduct their mortgage costs from their rental income. This means all the rental income they earn will be taxable, and they will instead receive a 20 per cent tax credit for their mortgage interest. Basic-rate taxpayers will see little change, but higher-rate taxpayers could see a significant increase to costs.


This is what the same situation might look like in 2020:

  • Annual rental income = £11,400
  • Annual mortgage interest = £7,200
  • Landlord will still pay tax on £7,200
  • Landlord gets a tax credit of 20 per cent, which is £1,440 in this case

So, a basic-rate taxpayer will pay £840 in tax, representing no change.


A higher-rate taxpayer, however, will pay £3,120 – which is double the amount of tax they would have paid on their 2018 tax bill, before the changes came into force.