Buy-To-Let Tax Relief Is Changing Soon

From April 2017, tax law surrounding buy-to-let property is changing. If you own a rental property it is important you understand fully how these changes will affect your tax position. Tax relief on mortgage interest will be reduced from next week, on a tapered approach until 2020.

What is changing?

At the moment, if you own a rental property it is possible to deduct the mortgage interest, in its entirety, against the rental income.

For landlords, mortgage interest is the largest expense per month, even if they only have an interest-only mortgage arrangement, so this tax relief certainly helps to keep tax on rental profits to a minimum.

From April 2020, tax relief will only be deducted at the basic rate of tax. This means that anyone paying higher rate tax will suffer, as the rental income will be taxed at the higher rates of 40% (higher rate) or 45% (top rate) whilst tax relief can only be claimed on mortgage interest at 20% (basic rate).

These are based on 16/17 income tax rates.

The process of introducing this new tax system starts from April 2017, with a tapering of the tax relief available, as follows:

  • April 2017 – higher rates can be claimed for 75% of mortgage interest costs
  • April 2018 – higher rates can be claimed for 50% of mortgage interest costs
  • April 2019 – higher rates can be claimed for 25% of mortgage interest costs
  • April 2020 – only basic rate tax relief can be claimed

How the rules will affect you

The new rules will affect you if you are a higher rate or top-rate taxpayer, and have a mortgage.

Tax payable could in fact increase two fold in some cases so that all the rental profits are eaten up in tax payments.

Basic rate taxpayers may also be affected, as a reduction in tax relief may result in your rental profits exceeding the basic-rate tax threshold.

These could make the investment financially unviable, so it is important to work out the projected income and profits over the next few years so you can make key decisions.

Practical suggestions

Some people are considering selling their property and reinvesting the money elsewhere. Always take advice before making any drastic decisions, as they may be other factors to take into account.

Paying off your buy-to-let mortgage is another option, if you have funds available. The new changes only affect those with a mortgaged property.

Work with an accountant on wider tax planning for your rental property and business as a whole.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.


Please contact us for more information:
T: 020 3866 8951

Follow AJN Accountants on Twitter for regular updates.