Before April 2017, private landlords could benefit from a considerable tax relief which allowed them to offset mortgage payments. The new regulations in April of 2017 meant that some of these landlords would pay more tax than before on all their income received from rents.
Prior to 2017 (April)
Landlords that had a mortgage on their properties could deduct the interest paid during the year and treat it as an expense.
An example: If your rental income in a year is £15,000 and your interest payment on mortgages for the year was £10,000, it was possible to include the full £10,000 as an expense to deduct from your rental income. The only tax you would pay would be based on the leftover £5,000 profit. This means if your tax bracket was basic rate (20%), the tax bill you would pay based on your rental income would be £1,000.
After 2017 (April)
The new regulations for the buy-to-let tax system began its transition at the beginning of the tax year of 2017-2018. The plan was to implement the new regulations yearly until they reach full functionality in 2020.
What this meant was that for each year after 2017, the percentage of interest payment on mortgages that you could remove from all your income from rentals would be reduced by increments of 25%. Therefore, the section of interest payments qualified to be included for the brand-new regulations will be functional in yearly increments of 25 per cent.
| Tax Year | Mortgage Income Restriction allowable for tax year | Basic rate reduction |
| After April 2020 | 0% | 100% |
| 2019 – 2020 | 25% | 75% |
| 2018 – 2019 | 50% | 50% |
| 2017 – 2018 | 75% | 25% |
| Before April 2017 | 100% | 0% |
In the 2019/2020 tax year, you will only be allowed to deduct 25% of all your mortgage interest payments from your total rental income before you pay your tax.
Let’s assume your rental income in a year is £15,000 and your total mortgage interest payment for the year was £10,000. You’ll have to pay tax on 25% of £10,000 deducted from £15,000 which amounts to £12,500 — depending on your tax bracket.
The tax relief will then be calculated based on 75% of your mortgage interest payments which amounts to £7,500.
You will now be free to remove £1,500 from your tax bill as a result of the tax relief of 20%, which leaves you with the total tax bill you have to pay on your rental income.
| Tax Brackets | The tax bill on £12,500(25% of mortgage interest payment removed from the income of annual rents) | Tax credit 20% of £7,500 (75% of all payment interest on mortgage) | Sum of tax bill to pay before 2017 April | Sum of tax bill allowable for the 2019/20 tax year |
| 20% | £2500 | £1500 | £1000 | £1000 |
| 40% | £5000 | £1500 | £4000 | £3500 |
| 45% | £5625 | £1500 | £4750 | £4125 |
Things to Look Out For:
– Basic rate taxpayers won’t be affected, but the higher and additional rate may be paying more taxes than they were before.
– Landlords with smaller profit margins may be in the negative after paying tax, which means they are losing money.
– Some might move to an increased tax bracket after declaring the income from rents they use for their interest payments.
What’s Next?
These new changes to the regulation only apply to individual and private landlords. It would be advisable to start your own company — a limited company in a bid to make sure the new system does not affect you drastically.
