Recent tax changes on Buy-to-Let properties

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After a recent walk in the park with some friends, I got talking with a lady in the group who owns a couple of investment properties. Whilst talking, I mentioned the recent tax changes to Buy-to-Let properties and was surprised that she wasn’t aware of them and how it will impact her. So it got me thinking about how many more landlords are in the same situation.

Currently, under the Mortgage Interest Tax Relief (MITR) system, landlords are able to deduct all interest paid on buy-to-let mortgages as an expense against any rental income. However, in the Summer Budget 2015, the Chancellor announced plans to change the rules on tax relief on finance costs for landlords.

Whilst this has the potential to add a number of difficulties to landlords, the government has kindly agreed to give landlords time to adjust to these changes, so the new system will be phased in over a 4-year period.

What are the changes for Buy-to-Let properties?

From April 1st 2017, the ability to deduct mortgage interest payments will be phased out and replaced with a flat rate of 20% tax relief. For basic rate tax payers paying 20% tax this should not really affect them, however for higher rate tax payers paying 40-45%, they will notice a huge impact on their profits.

Tax Year 2016/17 2017/18 2018/19 2019/20


% of Finance costs allowable for deduction

100 % 75 % 50 % 25%  0%
% of Finance costs eligible for flat rate tax relief (20%) 0% 25% 50% 75%


How might this affect you?

Well, whilst the change will affect nearly all tax paying landlords, just how much will depend on a number of factors including your current rate of Income tax, might this tax change push you into a higher tax band? Or the number of properties that you have, will this tax change reduce the return on your investment?

This recent Telegraph article  highlights a number of individuals with differing issues bought on by this tax change and offers solutions on how to beat the change.

What can you do about it?

Firstly, it’s important to understand exactly what your situation is. Once you know this you can start to consider your options:

If you own a smaller property portfolio, you really need to focus on reducing costs, could you:

  • Utilise your offset mortgage, by moving savings into your offset mortgage you could reduce your annual interest charge,
  • Re-mortgage to get a lower interest rate, or reduce the mortgage amount,
  • Raising rents, increasing the monthly rental charge of your property would lessen the impact of the tax hike, however it’s possible that you might lose your tenants as a result.

If you have a larger portfolio, you need to plan:

  • Selling and re-investing, if you have property with a large mortgage, could you sell and then re-invest in smaller properties elsewhere?
  • Go Limited, Place your property portfolio into a limited company structure, which would result in you paying corporation tax on profits which would be lower than income tax,
  • Transfer ownership, Transfer the property to your spouse, if they currently sit in the lower tax bracket (but be careful that by doing this subject them to a higher rate of tax).

One thing is for sure, this is not going away and if you choose to do nothing, only the tax man will benefit.

So, if you need some help to truly understand the implications of this new buy-to-let tax change then get in touch today and we will be glad to help.