Landlord Tax – the issue that won’t go away

Like death, taxes are inevitable. But tax has an annoying habit of changing every time there’s a budget and whenever the Government wants to exert its influence. Right now, Landlords are on the receiving end of measures designed to modify the provision of housing. Even if you invested in your portfolio years ago, with sound financial planning at the time, the situation has changed.

This coming tax year marks a new era for buy-to-let investors. With many changes afoot, landlords need to take a thorough look at current portfolios and think carefully about potential future investments.

It is now more expensive to buy since the 3pc stamp duty surcharge was introduced last year.

It’s more expensive to own, since the loss of the 10pc wear-and-tear allowance. And the benefits of having debt are diminishing now that tax relief on mortgage interest is being phased out.

Some are calling this the end of buy-to-let (BTL) for all but the richest, as wealthy landlords who do not need mortgages are untouched. The number of new BTL borrowers plummeted from 29,100 in March 2016 to 4,200 the following month, when the stamp duty surcharge was introduced, and has struggled to pick up substantially since, according to figures from the Council of Mortgage Lenders.

Higher taxation is forcing many landlords to rethink their strategy – and in some cases sell up. “It comes as a blow for many who may have been inclined to try and enter the market as demand for rental property has increased,” comments James Davis, chief executive of the online estate agency Upad.

At the moment, landlords can deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability. But this interest relief is being slashed from the current 100% to zero, the change being phased in gradually between April 2017 and April 2020. What will happen instead is that the income tax on someone’s property profits and any other income sources will be totted up, and they will then be granted a “tax credit” worth 20% of the mortgage interest cost to offset against income tax.

This might sound like quite a technical change, but the result will be that the amount of tax owed by some landlords will double or even triple. New figures produced by mortgage broker John Charcol suggest some could see their annual net profit tumble by 84%.

Landlord tax will now be due on turnover, rather than profit. If mortgage rates rise, but rents don’t, landlords are quickly left out of pocket. For some, tax rates will exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.

Any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.

For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.

But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.

So what’s the answer? An increasing number of landlords are opting to hold their properties in limited companies, which are not subject to the same taxes. Some will opt to only use a company for any new properties they buy. Whatever you decide, if you are not looking to sell up then it is time to take tax seriously.

For more info see


Leave a Reply

Your email address will not be published. Required fields are marked *