Tax relief reductions affecting landlords

The next instalment of tax changes affecting landlords and investors in buy-to-let properties takes effect from 6 April.

George Osborne’s reform of tax relief on buy-to-let residential mortgage interest was announced in the summer 2015 Budget. The change began in April 2017, with the full effect not felt until 2020/21.

Borrowers will get a 20% tax credit on interest under the new scheme, instead of deducting interest against rental income. This is equivalent to basic rate relief, and it increases borrowing costs for higher or additional rate taxpayers. The change is being phased in until 2020/21. The amount of interest deductible against rental income is 75% for 2017/18, reducing by 25% each year after. Borrowers can claim 25% of the tax credit in 2017/18, increasing by 25% a year to reach 100% from 2020/21.

One consequence is that taxable income will increase. This can have unfortunate tax side effects – for example, pushing a borrower over an important tax threshold such as the £100,000 income level at which the personal allowance begins to be tapered away.

In the longer term, the impact of the reform could be significant for higher and additional rate taxpayers. The switch to a 20% tax credit could even turn a profit into a loss for a higher rate taxpayer.

Some buy-to-let investors are planning to sell in the face of the growing tax burden. If that includes you, talk to us about all your options.

The Financial Conduct Authority (FCA) does not regulate tax advice. Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change. Business buy-to-let and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.

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