Under new rules being phased in by April 2020, landlords will progressively lose valuable tax relief on their buy-to-let mortgage costs. We explain what the changes mean for you.

What is buy-to-let mortgage interest tax relief? Since April 2017, the way landlords have to declare their rental income has started to change, meaning most will see their tax bills rise significantly. While borrowing money through a buy-to-let mortgage was once a major tax advantage, it’s no longer the case. This guide explains what changes are taking place, how they affect how much tax landlords have to pay. Video: how buy-to-let mortgage tax relief has changed for landlords Our short video explains the tax changes for landlords with buy-to-let mortgages.

Landlord mortgage interest tax relief in 2019-20 Since April 2017, tax relief on mortgage interest has been gradually phased out. By April 2020, you won’t be able to deduct any of your mortgage expenses from rental income to reduce your tax bill. Instead, you’ll receive a tax-credit, based on 20% of your mortgage interest payments.

This is less generous 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 several years. In 2019-20, you can deduct one quarter of your rental income, while three quarters of your mortgage interest payments will receive the tax credit. As of April 2020, all mortgage interest will only receive 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.

Why the tax credit is bad news for landlords This new system will potentially increase your tax bill in two ways. If you’re a higher or additional-rate taxpayer, you won’t get all the tax back on your mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid. Less obviously, you could also be forced into a higher tax bracket because you’ll need to declare the income that was used to pay the mortgage on your tax return. This could push your total income into the higher (£50,000 in 2019-20) or additional-rate (£150,000) tax brackets, depending on your income from other sources, such as your salary or pension.

Mortgage interest tax relief in 2020: an example Going back to our example of a landlord that charges £950 per month rental income, with mortgage interest payments of £600 per month.

  • They’ll pay tax on the full £11,400 rental income they earn
  • They’ll still pay £7,200 in mortgage interest
  • They’ll get a tax credit of £1,440 (£7,200 x 20%)
  • A basic-rate taxpayer will pay £840 – no increase
  • A higher-rate taxpayer will pay £3,120 – double the tax
  • The chart below shows how this is calculated.

Can landlords incorporate to keep their mortgage interest relief? This change in tax relief only affects private landlords – people who own their properties as individuals (or couples), rather than through a business. In theory, by setting up a business that owns their rental properties, landlords will be able to continue to declare rental income after deducting the mortgage. However, if you’re considering doing this is vital to research it thoroughly, as even with this tax saving you could end up far worse off.

There are a few reasons for this, but the main one is that mortgage rates for businesses are more expensive than for private landlords, which could cost more than you’d save in higher tax relief.

You’d also need to pay an extra round 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.

Finally, if you incorporate your taxes will become more complex. Instead of paying income tax on your rental income, you’ll need 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. This will be taxed as income, but at a lower rate than if you’d received the income directly.


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