Do entrepreneurs get mortgage interest relief? Why don’t I get any mortgage interest refund as a self-employed person? These are common questions I receive from clients when they are about to buy a house or have just bought one. How does mortgage interest relief work, and what does it mean for entrepreneurs? In this article, I will explain it.
What is mortgage interest relief? We first need to understand what mortgage interest relief is before we can address how it applies to you as an entrepreneur. When you buy a house and borrow money for it, you typically do so through a mortgage. A mortgage is a loan where you (often) provide real estate as collateral.
Mortgage interest relief has been in place since 1893. The idea behind it was that the property provides a (notional) benefit, so the associated costs (interest) should also be deductible. The cost in this case is the interest you pay. When you take out a mortgage, you pay monthly interest to the lender. This interest is deductible from your taxable income. If you’ve purchased a house with a mortgage, you can deduct the interest you pay on the mortgage from your taxable income. This leads to a lower taxable income, meaning you pay less tax.
Most people are employed. When you're employed, your employer deducts your income tax on your behalf, through payroll taxes (Loonbelasting). If you have a mortgage, your taxable income decreases as mentioned. However, your employer has already paid tax on your salary. When your final tax liability is calculated, it often turns out that too much tax has been deducted. The difference between the payroll tax already paid and the actual income tax owed is refunded to you.This refund is commonly referred to as mortgage interest relief, although technically,
it’s the foundation of the refund process.
Can you apply for a provisional refund if you know you will be paying mortgage interest? If you have a mortgage, you know you will be paying interest. Since this interest is deductible, you can calculate how much your taxable income will be, and thus how much tax you’ll get refunded. Based on this calculation, you can submit a request to the tax authorities and, as a result, you will receive a monthly refund from the tax office based on the taxable income you expect.
Above, we primarily discussed mortgage interest relief for employees. Do entrepreneurs also get mortgage interest relief? The short answer is: Yes! However, in practice, it’s a bit more complicated. We need to distinguish between two types of entrepreneurs. On the one hand, we have sole traders (or partnerships), and on the other, we have directors of a limited company (Ltd), also known as DGA (directeur-grootaandeelhouder).
The first question is: How does mortgage interest relief work for sole traders? As mentioned, you don’t get the mortgage interest you’ve paid back directly, but it does lower your taxable income. This means you pay less tax. Ultimately, the benefit is the same as for employees, although it might not feel that way since you don’t get money back right away.
Do you get mortgage interest relief as a DGA? As a DGA, you are an employee of the limited company. This means that the company also pays payroll tax on your salary. As a result, the tax refund process for mortgage interest relief is the same as if you were employed by someone else. You can, therefore, also apply for a provisional refund as a DGA.
As you can see, it can be confusing when incorrect terminology is used. Moreover, the benefits of mortgage interest relief are independent of the form of business ownership. However, the implementation does differ. Therefore, it’s always a good idea to consult both your mortgage advisor and your tax advisor or accountant before buying a property, so you fully understand the tax implications.
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