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Buy-to-Let Tax Relief Changes: Advice For Landlords

By March 18, 2019February 16th, 2021No Comments

Since April 2017, changes to Buy-to-Let Tax Relief have been phased in, making it more difficult for many landlords to make a profit. Many landlords are still unaware of these changes, leading to incorrect tax returns, penalties, and possible investigation by HMRC.

View of old houses from above

Here, we explain the changes and the impact they may have on you as a landlord.

The situation so far

Up until April 2017, private landlords who had a mortgage on their property were able to deduct any interest on mortgage payments from their rental income before any tax was paid on it – so they didn’t pay any tax on mortgage interest payments.

For example, if a landlord makes £15,000 a year in rental income and pays £10,000 in mortgage interest, they used to be able to deduct the £10,000 from their income first, leaving £5,000 as the taxable amount.

Since April 2017 a new system has been phased in, coming into full effect from April 2020.

What’s changing?

The new buy-to-let tax system stops landlords from deducting any of their mortgage interest and financial chargespayments from their rental income before paying tax. Instead, the entire sum of the mortgage interest payment qualifies for a 20% tax relief.

For example, if a landlord makes £15,000 a year in rental income and pays £10,000 a year in mortgage interest, they will need to pay tax on the full £15,000, but will then be able to deduct 20% of the loan interest paid from their tax bill due to the new tax credit.

This new system has been phased in over the last few tax years, and will be fully in place from April 2020:

% of mortgage interest payments deductible from rental income % of mortgage interest payments qualifying for new 20% tax credit
2016/17 tax year 100% 0%
2017/18 tax year 75% 25%
2018/19 tax year 50% 50%
2019/20 tax year 25% 75%
2020/21 tax year onwards 0% 100%

What impact will these changes have?

These changes only affect private and individual landlords. It’s those in higher tax brackets who will see the biggest change, as the only tax relief they’ll receive is this 20% credit on their mortgage interest payments, instead of being able to deduct directly from their rental income.

In addition, some basic rate tax payers may find themselves in a higher tax bracket, as they will now need to declare the rental income before deducting the interest payments.

For those who already have a small profit margin, these changes could be enough to trigger negative earnings.

A number of landlords are unaware of this change or have not correctly completed their tax return forms for 2017/18, resulting in them being open to investigation by HMRC and penalties.

Many private landlords are now setting up their own limited company in order to reduce the impact of the new tax system. However, to do this the property needs to transfer in ownership from the individual to the limited company, which is technically a sale, so there could be capital gains tax to pay.

Our advice for private and individual landlords

The only way to be sure about the financial impacts or to check you are dealing with it correctly is to seek professional help. We highly recommend that you work with an accountant to help you make an informed decision for your business.

Warr & Co are specialist landlord accountants with years of experience, and we can help you understand the impact of these tax changes on you and your property. Get in touch today for more information.

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