Landlord tax changes: Are you about to be pushed up a tax bracket?

The most significant change to the way that landlords with borrowings are being taxed is introduced today. Here’s what you need to know.

Who is affected?

The changes will affect all landlords with finance costs associated with letting their properties, although in this blog we refer primarily to mortgage interest costs, because buy-to-let borrowing is the most prevalent source of finance in the sector.

What’s changing?

You’ve probably heard by now, but when calculating your taxable profit your ability to deduct finance costs from your rental income/ turnover is being phased out over the next 4 years. Instead you will be able to claim just 20 per cent of your finance costs as a tax reduction.

What are the exact details?

To fully grasp what will be changing we first need to understand the difference between:

Tax deductions – legitimate business costs that are deducted from your rental income before you declare your taxable profit.

Tax reductions – reductions to your tax bill after your taxable income, and therefore profit, has been calculated.

Here goes….

Until today (6 April 2017) you were able to deduct your mortgage interest costs from your rental income before declaring your profit to the taxman. But by the time we reach the 2020-21 tax year you will no longer be able to do this. Instead, you will receive a tax reduction to your final tax bill, the equivalent of 20% of your mortgage interest costs – regardless whether you are a higher rate tax payer.

Are the changes immediate? 

The changes aren’t being introduced immediately, and will be phased in over the course of the next 4 years…

  • Year 1: Current financial year (2017-18): This year you can deduct 75% of your mortgage interest costs from your rental income before declaring your taxable profit. The remaining 25% of your mortgage interest will then be used to calculate a tax reduction (equivalent to the basic rate of Income Tax of 20%) which is then applied to your final tax bill.
  • Year 2: 2018-19: Next year, the split will be 50% deduction and a 50% reduction.
  • Year 3: 2019-20: In year three the split will be 25% deduction and a 75% reduction.
  • Year 4: 2020-21:…until finally, by year 4 you will no longer be able to deduct any of your mortgage interest costs and receive only the tax reduction.

What’s the take away message?

Your mortgage interest costs are no longer deductible and will count towards your taxable income.

The NLA predicts that almost half a million landlords who currently pay the basic rate of tax will be forced into a higher tax bracket as a result.

Is there a way around the changes?

Yes, but only if you own your properties as part of a limited company, in which case you will continue to pay corporation tax on your profits alone. However, transferring personally held properties into a company incurs potentially both capital gains and stamp duty charges, which will price the process out of most landlords’ financial capabilities.

We estimate that a ‘typical’ landlord with only one or two properties and fairly standard gearing would take in excess of 8 years to recoup the cost of incorporation. Hardly worthwhile for the majority.

What are my options?

There are a few options for landlords who will be hit by the changes:

  1. Incorporate: as above, many landlords have taken this action already, but sadly the costs involved mean it isn’t an option for everyone.
  2. Raise rents: faced with an increasing expense of providing housing many will have to raise rents in order to cover costs.
  3. Sell up: Many landlords will not be able to absorb the increased costs and will need to sell. There’s already evidence of this happening.

What is the NLA doing about it?

To date the NLA has, and continues to, lobby government over the changes, but while they are willing to listen to our arguments, they have yet to be convinced.

In order to provide a more compelling evidence base we have commissioned a large scale research project to outline the impact of the changes on the sector, and we’ll be sharing the findings with landlords and the Government in due course. NLA members can read more about this in the May / June edition of UK Landlord magazine.

The NLA also donated £10,000 to the (eventually unsuccessful) Judicial Review to fight the case at the High Court, and we remain, with other industry stakeholders, part of the Tenant Tax Coalition raising awareness on the matter.

What should I do?

If you are yet to do so, our advice is to crunch the numbers as soon as possible in order to assess whether you will be affected by the changes.

We also provide a list of trusted and vetted tax and accountancy specialist services through our Recognised Supplier scheme, including bespoke tax software from GoSimple Tax, which helps to calculate and submit your tax return directly to HMRC, even if you are not an expert. NLA Members receive a 50% discount.

13 thoughts on “Landlord tax changes: Are you about to be pushed up a tax bracket?

  1. For existing landlords this is the reason and necessity to increase rents to cover a new additional cost introduced by the goverment .
    New landlord beware of wasting your time on this investment class , goverment doesn’t want investment by private landlords into housing .
    You will as a landlord be taxed and migrating to a company will be more likely be blocked and hostile tax addressed by HMRC in future policy .

  2. Please keep on lobbying. My view is that small landlords, 2 -5 properties, whilst large in number own a small fraction of rented property. Most rented property is owned by large landlords most of whom I assume are incorporated. Also, I read yesterday, 90% of new build in Manchester, Birmingham etc is bought by foreign investors who then leave the property empty. So, overall, this tax is directed at small landlords who in total are not significant players in the overall market.

  3. Dear sirs, My wife and I are members of your association, Membership No.151564, and have been in the rental market since 1995. We were aware of the tax advantage with having a mortgage on property, and used it for a period of time (£110,000), but cheated a little by keeping about the same amount on an Interest account (when interest rates were quite high)., and of course did quite well from it. We have never been keen on loans, so we have always endeavoured to pay cash. Our current situation is that we own five rental properties in all, and have no loans at all, but are now concerned with what the Government is doing to Landlords. What we have done is to create our own Pension,which up to now has been fine, but are wondering if there are situations that we are not aware of, that we should be knowing about. Our accounts have been very straight forward until now, and I have always done our own, but I believe there are changes coming about that may necessitate my seeing an Accountant. I would be very interested to here your comments, and any other matters that i should know about. I am afraid my age is against me in some respects, as my capability on the computer is somewhat limited, but I would be very interested to here your comments, and advice on how I should proceed
    Yours Sincerely
    Brian J. Adlam

    1. Brian, as you are not used to the computer you may not realise your post here is seen by everyone. Can I suggest you phone the NLA and get their advice personally. The number is 0207 840 8939 and I have found them very helpful! Hope you find this…

  4. While I have no real problem with these changes in the context of a wealthy few who have a couple of rental properties as a way of diversifying their savings, there are a few Landlords whose only assets (and income) are a larger number of heavily mortgaged rental properties . These Landlords are now being charged a tax considerably larger than their total income which is clearly contrary to any principle of fair taxation. If your campaign focuses on these few then it should have a greater chance of success.

    1. I am a landlord with a few properties including my house consisting of 3 maisonettes. My only income derives from rental and I am in a low income tax bracket as I have large mortgages. However, this new cruel and unfair so-called taxation which is really tax on expenses and in my case, tax on losses is the most unfair and unprincipled form of getting more money out of people, targeting only middle sector with large debts. Politicians such as George Osborne and Philip Hammond (who recently put his house in his wife’s name) too rich to have any clue what this rubbish law means for survival of some landlords. I will be pushed to a high income tax bracket although, my profit is only £18,000 annually and be forced to pay £39,000 per year tax. As I will not be able to do this I will have to either sell up or go bankrupt if I am unable to sell. I am sure there will be many people in my position. This is the most significant injustice I have ever witnessed in the U.K. especially, the High Court having refused the judicial review, putting doubt and uncertainty on the justice system. If this law is not overturned I will lose all my trust and confidence for fairness in this country.

      1. Hi Shari
        I know this isn’t what you want to hear, and I completely agree with you, but don’t go bankrupt, it is the worst thing in the world. Hope for the best and plan for the worst, so if you have to sell anything, let the landlord community know because there may be a bright spark out there who knows a better way. Good luck

      2. Shari I may be wrong but it looks to me that if you are a basic rate tax payer you will be unaffected as you will get a 20% tax reduction. Here is my source, might be worth a look ttps://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

  5. I don’t understand how to work out the tax reduction you are talking about. Please would you clarify this for me. Thanks

  6. I can’t for the life of me understand why you pay tax on a charge. This has no bearing on the landlords overall profit margins. The writing is on the wall. More taxes to pay, add to this
    , speculation of interest rate rises also for the landlords whom are in negative equity and can’t change unless they’re in a position to finance the mortgage to get it to an acceptable LTV.
    I’m all for paying my dues however as corporation tax dictates, pay tax on profit. Also after you’ve crunched the numbers and think…. Yes it’s worth going down the incorporate route, your last stumbling block is that most mortgage lenders will not let you transfere to this type of business and for the ones that do, the net will close.

  7. I am just wondering if the campaign against unlawful abolition of mortgage interest tax relief is still going ahead as this is discriminatory against those with large mortgages as myself?

    Government has only targeted the middle class, and has left the rich who are able to use tax avoidance schemes and or involve in tax evasion.

    Please advise.

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