Preparing buy-to-let clients for tax relief changes

Author: Chris Maggs, Commercial Manager at Accord Buy To Let

2016 was the year when the total housing wealth owned by the UK’s landlords overtook that held in mortgages of owner-occupiers, underlining just how important the private rented sector is to the UK’s housing market. Many landlords will be aware of the uplift in Stamp Duty on buy-to-let and second homes, but fewer may be ready for the changes to tax relief that were introduced this April. While landlords won’t see the impact until they get their tax bill in 2019 it is no reason for them to be complacent, which provides brokers with the opportunity to guide them through the changes.

What’s happening?

In his Summer Budget in 2015, then Chancellor George Osborne announced that landlords would no longer be able to deduct all their mortgage interest when calculating their profits, with changes to tax relief being phased in from April this year.


What were the changes?

Previously landlords’ could deduct both mortgage interest and other allowable costs associated with a let property from their rental income before calculating how much tax is due. However, since April 2017 this has changed. Landlords can only claim tax relief at the basic rate of tax (20%). So higher rate tax payers will see a significant reduction in profitability from a let property. Basic rate tax payers are unaffected.


Furthermore, tax relief will be given as a reduction in tax liability rather than a reduction to taxable income.

For instance, a landlord who previously paid tax at 40% with a rental income of £15,000 and £10,000 of mortgage interest will pay £2,500 in tax in the year 2017/2018 compared to £2,000 in the previous year.

This means he will see a £500 reduction in his net profit year-on-year, and a £2,000 reduction in net profit overall from the 2017/2018 to 2020/2021 tax years.

The only positive message for landlords is that the changes will be phased in at the rate of 25% per annum, so in the tax year 2020/21 the new tax rules will be fully integrated.

What does this mean for landlords?

While there are several good calculators online to help landlords assess the impact on their portfolio or any future purchases, many higher-rate taxpayers will see a dent on their net profit.  


Basic rate taxpayers will not be affected, but they could be further impacted as the new profit calculation could take them into a different tax band than they are currently in.

What landlords can do to lessen the impact on their portfolio?

Many landlords have looked at managing their property portfolios through a limited company where taxation rules are more favourable.


Whilst this may be a possible route for new property purchases it may not be viable option for landlords with an existing portfolio looking to transfer their current properties into a limited company, as this would mean they would have to sell their properties to their limited company which would incur additional costs.

How brokers can help?

It is important that landlords assess their portfolio as soon as possible, so you may want to encourage clients to visit you to discuss the changes and the best options for them.


Possible avenues you can explore together to lessen the blow, beside from limited company route, include refinancing their existing portfolios to obtain more competitive interest rates, or reduce the size of their portfolio to reduce overall borrowing. Landlords could also choose to put buy-to-let properties in their partner’s name if they are a basic tax rate payer.

Given the complexity and variety of different circumstances it may be worthwhile referring landlords to seek advice from a tax expert if your firm does not specialise in this area.

It is an unsettling time for both landlords and brokers, however there is still a big demand for the private rental sector and therefore there is a place for landlords. They have demonstrated resilience in the past with changes to the market, so by ensuring your clients have robust strategy plans in place to protect their investments you will be able to weather the storm together.