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Landlords paying up to 66% tax – full details of new tax rules revealed

2-minute read

Mollie Millman

11 September 2018

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Most landlords know their tax bill has risen since the government’s clampdown on the buy-to-let sector – but with the new rules being so complicated, are you up to speed on just how much this tax hike could affect you?

What’s the basis of the new tax rules?

Landlords no longer get full tax relief on the mortgage interest they pay, while a 20 per cent tax credit has been introduced. This means buy-to-let investors see their tax calculated on their total rental revenue rather than their profit after finance costs.

66% tax increase by 2020

The change is being phased in over four years, ending in the 2020 to 2021 tax year. Accountants Blick Rotherberg calculate that by then, higher rate taxpayers could be paying up to 66 per cent in tax.

This percentage reflects the overall effective rate of tax, calculated on the basis that a landlord who’s a higher rate taxpayer can no longer get full tax relief – as they could before – on their mortgage interest.

Example scenario

Under the new rules, typically priced £200,000 property with a mortgage of £120,000 will return a total after-tax profit of just £870 a year, according to Blick Rotherberg’s calculations – equivalent to a 66 per cent tax rate.

This tax rate is calculated by dividing the tax paid (£1,680 in 2020 to 2021 in the example) by the actual rental profit (rental income, minus expenses, minus mortgage interest).

Increasing rents to make up the shortfall

Realising that they are paying such a high effective tax rate may come as a surprise to some landlords. And you may be tempted – if you haven’t already – to increase rents to recoup some of your losses.

David Cox, Chief Executive of ARLA Propertymark, the trade body for letting agents, explained, “Buy-to-let investors are being pushed out of the market by increasing costs and continued regulatory change, and new landlords are being deterred from entering.

“Last month, an average of four landlords took their properties off the market per branch, up from three this time last year – and as supply falls, competition among tenants increases, which pushes up rent costs.

“Almost a third saw their rents rise last month, and although this figure was down from June, it's still far too high.

“To put tenants back in the driving seat, we need more homes available to rent, and the only way this will be achieved is if the government makes the market more attractive for buy-to-let investors,” he concluded.

Landlords operating via limited companies

Setting up a company is another way some landlords are clinging on to tax relief on their mortgage interest. In January 2018, we found that landlords operating via limited companies were making the vast majority of new applications for buy-to-let mortgages.

Lender Kent Reliance reported that more than 70 per cent of applications it received in the first nine months of 2017 came from companies rather than individuals.

Read more about it in our article on landlords using limited companies.

How have the new tax rules affected your buy-to-let investments? Let us know in the comments below.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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