Landlord tax: an overview of the changes to buy-to-let tax relief

From 6 April 2017, the government made changes to the way landlords are taxed in the UK. These landlord tax changes will be phased in over the next four years and will not be applied at the full rate straight away – allowing landlords to take necessary action over time.

Who will the changes affect?

These changes will only affect landlords in the list below who have a mortgage for their rental property.

* Any UK resident individual who lets a residential property in the UK or overseas

* Any non-UK resident individual that lets a residential property in the UK

* An individual who lets residential property in partnership with others

* Trustees of a trust directly holding UK residential property

NOTE: These tax changes will not apply to landlords of furnished holiday lets and commercial properties.

What do the landlord tax changes mean for me?

Restricted tax relief on mortgage interest payments

The main change being made under the new tax rules, is that landlords will no longer be able to fully claim tax relief on their mortgage interest payments – so this change will only affect landlords who have a mortgage and not those who own their property outright.

However, the majority of buy-to-let landlords have an interest-only mortgage.

Currently, landlords can deduct allowable expenses and mortgage interest payments from their rental income and pay tax on the difference.

But from April 2017, landlords will only be able to claim tax relief at the basic rate of 20% on whichever figure is lower:

* Finance costs – including mortgage interest payments, loan repayments, overdrafts

* Profit from your rental income – calculated as rental income less allowable expenses

* Total income – calculated as anything other than savings and dividend income above the personal allowance after deducting losses and tax relief

NOTE: In most circumstances, the finance costs will be the lowest figure. But it’s important to highlight that it’s not just mortgage interest payments that will be used to calculate tax relief, but the lesser of the three figures above.

See below as to how the landlord tax changes:

The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of Income Tax. This is being phased in from 6 April 2017 and will be fully in place from 6 April 2020.

How the tax reduction is worked out;

The reduction is the basic rate value (currently 20%) of the lower of:

* finance costs – costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward

* property business profits – the profits of the property business in the tax year (after using any brought forward losses)

* adjusted total income – the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance

The tax reduction is not able to be used to create a tax refund.

If the basic rate tax reduction is calculated using the ‘property business profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.

You are still able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction:

Tax Year Percentage of finance costs deductible from rental income Percentage of basic tax rate reduction
2017/2018 75% 25%

2018/2019

50%

50%

2019/2020

25%

75%

2020/2021

0%

100%