Don’t Get Caught Out. Everything You Need to Know About the New Buy-to-Let Taxes

The beginning of the current tax year saw a complete change in the way that buy-to-let investments are taxed in the UK. For many existing buy-to-let landlords who may have grown accustomed to the old system, this was a source of great confusion as they adapted to the new model. For those who are now considering becoming buy-to-let landlords, it’s important to consider the new taxation system in detail, to work out potential profits and how it will affect budgets, overall income and mortgage interest. Let’s take a look at how the new ‘buy-to-let tax’ works.

The new rules

Under the new rules, which came into play on April 6 2017, buy-to-let investors are now unable to offset 100% of their mortgage interest against the profits (as was the old way). Over the next four years, the amount of mortgage interest landlords can deduct from their profits will decrease, until it stands at 0% in 2020.

Currently, 75% of mortgage interest against profits are deductible. Next year, the figure will drop to 50%, then 25% in 2019, until it hits 0% at the end of the phasing process. This will eventually be replaced by a 20% credit on mortgage interest.

In 2020, if you’re a landlord earning a rental income of £20,000, with £15,000 of mortgage interest to pay, you’ll now have to pay tax on the full amount (minus the 20% credit on the mortgage interest). For a higher rate taxpayer, this means that they would owe £3,000 (£8,000 profit, minus £3,000 credit on mortgage interest).

The change could also result in some basic-rate taxpayers being pushed into a higher tax band, when considering rental income. The knock-on effect of this is that some could end up losing means-tested benefits as a result.

What can you do?

If you’re reading this article, you’re already doing one of the most important things you can do: being prepared. It’s important to plan ahead when it comes to matters of tax – landlords now have three years in which to tweak their portfolios in order to mitigate the impact of this buy-to-let tax.

Even landlords who have smaller portfolios will need to focus on reducing costs – if this applies to you, you could consider raising your rental prices slightly, or switching to a lower mortgage rate.

If you’re not sure how the rates will impact you, use one of the many online buy-to-let calculators to compare your old rates with the new ones, and work out your new earnings after tax.