Understanding tax changes: What does this mean for landlords?

What exactly are the changes?

It has been a momentous couple of years for Landlords. Last April, the Government introduced several changes to the way landlords calculate tax relief on the interest charged by their mortgage lenders. These changes are far reaching and will be gradually rolled out over the next couple of years until 2020.

The amount of income tax relief which landlords are now able to claim against mortgage interest, overdrafts or loans is restricted to the basic rate of tax.

In a nutshell the changes mean that

Historically, if you have a buy-to-let mortgage you only needed to pay income tax on rental income AFTER you have paid your mortgage and other costs, which could potentially reduce your tax bill by thousands.

In other words, you’d firstly deduct the interest from the mortgage on your rental property, in addition to any other expenses you’ve incurred throughout the year. The majority of landlords are on interest only mortgages, which in theory meant all of the mortgage repayments could be claimed.

You will no longer be able to deduct mortgage expenses from rental income to reduce your tax bill.

This will be phased in between now and 2020 as follows:

  • In the 2017-18 tax year, you can claim 75% of your mortgage tax relief
  • In the 2018-19 tax year, you can claim 50% of your mortgage tax relief
  • In the 2019-20 tax year, you can claim 25% of your mortgage tax relief



Who do the changes affect?

The change in tax relief only affects private landlords – people who own their properties as individuals (or couples) rather than through a business.

Therefore, in theory by setting up a business that owns the rental properties, landlords will be able to continue to declare rental income after deducting the mortgage.

However, if you’re considering this approach it is definitely worth consulting a professional property company like Progressive Lets who will be able to discuss the various options with you.

The UK Government has claimed that 82% of landlords won’t be impacted.

What other expenses can I claim? 

As rental income is now subject to tax in the same way as your salary is, it’s worth understanding what expenses you can deduct as these will help reduce your bill:

  • Letting agents’ fees
  • Accountants’ fees
  • Building and contents insurance
  • Interest on property loans
  • Maintenance and repairs to the property (not improvements)
  • Utility bills; council tax, ground rent and service charges
  • Any services you pay for, such as gardening or cleaning