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What Is Buy-To-Let Mortgage Interest Tax Relief?

Under new rules that came into force in April 2020, landlords will progressively lose valuable tax relief on their buy-to-let mortgage costs. This article will explain what the changes mean for you.

Buy-To-Let Mortgage Interest Tax Relief?

Since April 2017, the way landlords have had to declare their rental income to HMRC has begun to change. Most landlords will see their tax bills rise significantly. Once upon a time, borrowing money via a buy-to-let mortgage was a major tax advantage but now, this is no longer the case. Today Conveyancing Supermarket explains the changes that are taking place and how they affect how much tax landlords have to pay.

Buy-To-Let Mortgage Interest Tax Relief In 2021-22

As of April 2020, landlords are no longer able to deduct any mortgage expenses from their rental income to reduce tax bills. Instead, they will receive a tax-credit, based on 20% of the mortgage interest payments made. This is particularly bad news for higher-rate taxpayers, who effectively received 40% tax relief on mortgage payments under the old rules. The new system is being phased in over the next few years.

For the 2020-21 tax year, you could deduct one quarter of your mortgage interest payments, while three quarters of your mortgage interest payments received the tax credit.

For previous years:

  • In the 2017-18 tax year, you could claim 75% of your mortgage tax relief
  • In the 2018-19 tax year, you could claim 50% of your mortgage tax relief

In every tax year during the transition period, the percentage of your mortgage interest payments that you can deduct from your rental income will decrease by 25%, and the portion of those interest payments that qualify for the new tax credit will increase by 25%.

 

Tax YearPercentage of mortgage interest payments deductible from rental incomePercentage of mortgage interest payments qualifying for the new 20% tax credit
Before April 2017100%0%
2017-201875%25%
2018-201950%50%
2019-202025%75%
After April 20200%100%

 

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Who Is Affected?

You’ll be affected if you’re a:

  • UK resident individual that lets residential properties in the UK or overseas
  • non-UK resident individual that lets residential properties in the UK
  • individual who let such properties in partnership
  • trustee or beneficiary of trusts liable for Income Tax on the property profits

All residential landlords with finance costs will be affected, but only some will pay more tax.

You won’t be affected by the introduction of the finance cost restriction if you’re a:

  • UK resident company
  • non-UK resident companies
  • landlord of Furnished Holiday Lettings

You’ll continue to receive relief for interest and other finance costs in the usual way.

Bad News For Landlords

This new system could potentially increase your tax bill in two ways.

  • If you’re a higher or additional-rate taxpayer, you will not get all the tax back on your mortgage repayments as the credit only refunds tax at the basic 20% rate, not the top rate of tax paid.
  • You could be forced into a higher tax bracket because you will have to declare the income that was used to pay the mortgage on your tax return. This could push your total income into the higher (£50,270 in 2021-22; it was £50,000 in 2020-21) or additional-rate (£150,000) tax brackets, depending on your income from other sources, such as your salary or pension.

Can Landlords Incorporate And Keep Their Mortgage Interest Relief?

The changes in tax relief only affects private landlords – people who own their properties and rent them out, rather than those running a business. In theory, by setting up a business that owns their rental properties, you would think landlords would be able to continue to declare rental income after deducting the mortgage.

However, if you are considering doing this it is absolutely vital to research it thoroughly, as even with this tax saving you could end up much worse off. The main reason for this is that mortgage rates for businesses are more expensive than for private landlords, which could cost you more than you’d save in higher tax relief. You would also need to pay an extra lot of stamp duty when you transfer ownership of the property to the business.

You can use our calculator to work out your buy-to-let stamp duty bill.

Also, if you incorporate, your taxes will become more complicated; Instead of paying income tax on your rental income, you will have to file taxes for your business, and pay corporation tax on your profits. To receive the rental income, you’ll need to pay yourself a dividend which will be taxed as income, but at a lower rate than if you’d received the income directly. Complicated isn’t it.

We can help you Compare Buy to let conveyancing fees online and offer all the buy to let remortgage conveyancing advice you need.

The Old Regime

Before 2017, under the old regime, you would only pay income tax on your net rental income, or profits. In other words, you would deduct the interest from the mortgage on your rental property, as well as any other expenses incurred throughout the year. With the majority of landlords being on interest-only mortgages, this meant they could claim all of their mortgage repayments.

For buy to let remortgage conveyancing advice, get instant and free conveyance fees online from skilled conveyancing solicitors or licensed conveyancers. Get the best price and speed up your move whether you’re buying, selling or remortgaging.

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