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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 3rd September 2020*

We currently receive a huge number of enquiries from both prospective and existing property landlords who have been left rather confused about the changes to buy-to-let tax laws starting in 2017.

Whether you’re looking at purchasing a new buy-to-let property or have a large portfolio of buy-to-let properties and want to understand how the new buy-to-let tax rules will affect you, we recognise how important it is to have a full understanding of all the buy-to-let tax implications.

In order for you to have a clearer idea of the new buy-to-let rules we have produced this comprehensive buy-to-let tax guide which covers the following areas:

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Buy-to-let tax changes

To ease the pressure on the housing market, particularly for first-time buyers, the UK government introduced new rules for buy-to-let and second property owners in 2015. From 2019-2020, you can only claim 25% of mortgage interest tax relief, and Capital Gains Tax allowance has increased from £11,700 to £12,000 – 18% for basic-rate landlords. There’s also stamp duty increases.

See below for more information.

Stamp duty increase for second homes

Since 1st April 2016, all buy-to-let or second properties (basically, any residential property not classed as a main residence) carry an additional 3% stamp duty surcharge. The table below outlines exactly how this will work.

House price thresholdStandard Stamp Duty RateBTL/Second Property Stamp Duty Rate
Up to £125,0000%3%
£125,001 – £250,0002%5%
£250,001 – £925,0005%8%
£925,001 – £1.5 Million10%13%
£1.5 Million +12%15%

For example, if you purchased a buy-to-let property for £120,000 prior to April 2016 you would have paid no stamp duty surcharge. However, if you purchased a property for the same value now you would incur a surcharge of £3,600.

There are some exemptions to this additional stamp duty surcharge, namely:

  • Any property dwelling valued at £40,000 or less
  • Caravans, mobile homes and houseboats (regardless of value or intended usage)
  • First time buyers purchasing a buy-to-let property (will pay standard home mover rates)

Tax relief on buy-to-let mortgage interest to be phased out by 2021

Prior to April 2017, buy-to-let landlords were able to claim tax relief from HMRC by deducting all mortgage interest payments from their rental income. As most buy to let mortgages are, interest-only, this represented a fairly significant tax saving.

Since the 2017/18 tax year, the government has been phasing out the amount of buy-to-let mortgage interest tax relief that can be deducted from your income.

For example, in 2017/18 you could claim for 75%. From 2019/20 you can still claim 25%, then it will be fully replaced in 2020/21 by a simple tax credit of 20% (equivalent to the basic rate of tax) which you apply to your final tax bill.

Buy-to-let mortgage interest tax relief example

The table below illustrates how the tax relief on buy-to-let will be phased out and switched to a 20% tax credit.

Tax Year% Mortgage Interest Deductible From Rental Income% Mortgage Interest Qualifying for 20% Tax Credit
2017 – 1875%25%
2018 – 1950%50%
2019 – 205%8%
2020 – 21 (Onwards)0%100%

For example, if you pay mortgage interest on a buy-to-let property of £7,200 per year, prior to the 2017/18 tax year you would have subtracted this entire amount from your gross rental income. From the 2020/21 tax year you will only be able to use 20% of this amount ( £1,440) to reduce the tax you owe.

For more information about buy-to-let mortgages, make an enquiry with us and we can arrange for an advisor we work with to speak with you directly.

Have the buy-to-let mortgage tax changes affected affordability assessments for BTL properties?

Yes they have. Following the new tax reforms, the Prudential Regulation Authority (PRA) introduced a set of new guidelines in 2017 which had a direct effect on buy-to-let affordability criteria, mainly:

  • Stricter usage of ‘stress rates’ for rental income amounts
  • Full review of an applicant’s tax position as part of an affordability assessment
  • Greater scrutiny of portfolios with four or more properties

Up until the introduction of these changes, most lenders would want to see the rental income for a property achieving at least 125% of the mortgage interest payments. This is known as the ‘stress rate’ or Interest Coverage Ratio (ICR).

However, lenders were previously able to relax these stress rates which caused issues, in some cases, if rents were to cease for any prolonged period. The new PRA regulations dictate a minimum stress rate of 125% tied to an interest rate of 5.5% must apply, which most lenders now use.

Some lenders will actually use a higher rate of up to 145% and a few go up to 160% in order to cater for high-rate taxpayers who have to consider a higher tax liability now mortgage interest tax relief is being phased out.

If you’d like to understand more about the affordability assessments conducted by lenders in light of the BTL tax changes take a look at our article here.

How could the tax on buy-to-let income affect landlords?

The example below will help put the buy-to-let income tax changes into perspective…

Buy-to-let tax changes: example

Prior to all of the new tax rules for buy-to-let outlined above, if you had a BTL property with annual rental income of £10,000 and you paid mortgage interest of £4,500 you would declare the net difference of the two amounts – £5,500.

A basic rate taxpayer would then pay £1,100 tax (20%) and a higher rate taxpayer would pay £2,200 (40%).

If we use the same examples above but move to the 2020/21 tax year whereby only a 20% tax credit will apply, there’s no difference for basic rate taxpayers. However, a higher rate taxpayer will be liable for £3,100 (( £10,000 x 40%) – ( £4,500 x 20%)).

As you can see, the phasing out of mortgage interest tax relief does have an impact on the profits a buy-to-let landlord will make, if they are a high-rate taxpayer or on the threshold between base-rate and high-rate as a result of these changes.

There’s a lot of information to take in here, why not let us help out? If you make an enquiry we can arrange for a buy-to-let tax specialist to get in touch and discuss, in more detail, your own personal situation.

What is a buy-to-let tax calculator and how does it work?

A buy-to-let tax calculator is a tool that is regularly used by UK lenders and advisors which will work out how much tax is due on the rental income from a buy-to-let property.

If you’re concerned about the buy-to-let tax changes you can use this type of calculator to find out how these new rules could affect your rental income. The good news is such instruments are not exclusive to mortgage providers.

You can also take a look at HMRC’s own buy-to-let tax calculator which also includes an overview of the tax treatment for rental properties here.

What is a buy-to-let tax relief calculator?

A buy-to-let tax relief calculator will specifically calculate how much tax relief you are able to claim on your mortgage interest based on the new rules on buy-to-let properties.

Frequently Asked Questions

Got a question that we haven’t yet answered? Check out our Q&As below.

Do I have to pay capital gains tax on sale of a buy-to-let property?

Yes, it’s possible. Capital Gains Tax (CGT) may be payable upon the profit when selling any property which is not deemed to be your main residence. If no profit is made then no CGT applies.

Is there any way I can avoid paying capital gains tax on a buy-to-let property?

While you shouldn’t “avoid” a tax you’re liable to pay (this would be classed as buy-to-let tax avoidance), there are ways you can minimise the amount that is due on a BTL property.

The good news is, HMRC offer an allowance (currently £12,000 for 2019/2020) where no tax is payable on profits up to this amount. You can also deduct all buying and selling fees from the profit you make on a buy-to-let property along with any significant renovation costs (such as replacing windows).

If you make a profit beyond the allowance, this amount is added to your next tax return and settled at this point. However, from April 2020 all capital gains tax on buy-to-let properties will be due 30 days from completion of the sale.

If you have a limited company for your property portfolio then the company will pay corporation tax rather than CGT.

For more information about buy-to-let mortgages, make an enquiry with us and we can arrange for an expert to contact you directly.

Is it better to run my property portfolio through a limited company or keep everything in my personal name?

There isn’t a ‘one size fits all’ for this. In some aspects, there may be better tax advantages for limited companies than for individuals when running a buy-to-let portfolio.

However, there’s no guarantee that what tax advantages exist now maybe there in the future. There’s also a lot more administration involved with running a limited company than in your own name.

Transferring an existing property portfolio across from personal to a company name can also be a tricky affair which requires appropriate professional assistance in order to get it right without incurring any fresh stamp duty or capital gains tax charges during the process.

Speak to a qualified specialist to determine what’s best for you.

Do I qualify for entrepreneur relief if I sell my buy-to-let portfolio?

Entrepreneur relief is additional tax relief available to those who have recently sold their business and allows you to pay a reduced Capital Gains Tax rate of 10% on your profitable gains.

Generally, it is only available to those operating a ‘trade’ and, therefore, doesn’t usually apply to property portfolios.

Who pays council tax on a buy-to-let property?

If you’re a landlord of a buy-to-let property with its own council tax banding with one or joint tenants, typically it would be the tenants who would pay the council tax.

It only usually houses of multiple occupation (HMOs) with many tenants under one roof where the landlord would pay the bill. In this instance, the council tax on buy-to-let properties would be reflected in the rental payment and can be regarded as an allowable tax-deductible expense.

Other costs incurred for the running and maintaining of your buy-to-let property (and, therefore, reflected in the rental payment) that are tax-deductible expenses include:

  • Utilities (water, gas, electric)
  • Contents insurance
  • Maintenance (gardening, cleaning)
  • Ground rent
  • Letting agent’s fees

Do the different tax rules vary across different countries within the UK?

Yes, they can vary slightly for stamp duty. England and Northern Ireland are both the same as outlined above. In Wales, stamp duty is referred to as the Land Transaction Tax (LTT) and has a slightly higher initial threshold of £180,000. The standard rates are slightly different but the extra 3% surcharge for second properties is the same.

For buy-to-let landlords in Scotland, stamp duty is known as Land and Buildings Transaction Tax ( LBTT) and, as with Wales, it has a slightly higher initial threshold of £145,000 but charges the same additional 3% surcharge for buy-to-let properties as with the rest of the UK.

If you live overseas and wish to buy a second property in the UK the additional 3% stamp duty surcharge will also apply regardless of your residency status.

Why you should speak to an expert buy-to-let broker

At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:

  • Have whole of market access
  • Have excellent relationships with lenders
  • Are OMA accredited advisors
  • Have completed a 12 module LIBF accredited training course

Speak to a buy-to-let expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 3rd September 2020
OnlineMortgageAdvisor 2020 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.