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Buy-to-let mortgage tax relief changes: a guide for landlords

A buy-to-let mortgage is a handy way to manage the cost of home ownership. It provides you with a streamlined way to purchase and then rent out a property, while possibly helping to put a little extra money in your pocket every month. Because of this, buy-to-let mortgages are a popular option for those looking to branch out into the world of portfolio management.

However, changes made to the way landlords had to pay tax on these kinds of loans have given some food for thought in recent years. While still a viable way for property owners to manage their assets, there are now additional factors to keep in mind when it comes to the tax relief offered on buy-to-let mortgage interest payments.

In this guide, we’ll look at some of the most important things which landlords should be aware of. From understanding what the buy-to-let tax relief changes are, to better appreciating what they mean to you, we’ll assess everything you need to know.

What change was made to buy-to-let mortgage tax?

The way in which landlords paid tax on mortgage interest changed in April of 2020, after a four-year phasing out programme. Before the plan was introduced in 2017, landlords were able to deduct financial expenses from all their rental income. This included mortgage interest payments.

That all changed in April of 2020. Landlords with buy-to-let mortgages can now no longer deduct mortgage interest from rental income to lower their tax bill at the end of the year. Instead, they now have to pay full tax on any money earned this way.

Between 2017 and 2020, landlords were provided with a system which helped them prepare for the upcoming hit. This saw them still able to deduct a certain percentage of financial costs from their rental income, worked out at an annual rate which slowly lowered:

Financial year % available to deduct % which tax had to be paid on
2017-18 75% 25%
2018-19 50% 50%
2019-20 25% 75%
2020-21 0% 100%

From April 2020 onwards, buy-to-let owners have been unable to deduct any financial costs from their rental income tax bill.

What is the buy-to-let mortgage tax relief?

Alongside the change to the way mortgages were taxed, HMRC also introduced the buy-to-let tax relief. This system meant everyone paying a buy-to-let mortgage would benefit from a 20% tax credit, based on the amount of mortgage interest paid, no matter what financial tax bracket they found themselves in.

After the change, landlords who had been able to claim mortgage interest on their rental income at a higher rate of tax were now unable to. Someone in a higher tax bracket might have claimed a 40% or 45% reduction on these costs under the old system, but were now only able to claim 20% back under the new guidelines.

2024-25 buy-to-let mortgage tax relief example

One of the easiest ways to understand what the tax relief means for a landlord is to use a practical example with the tax brackets for the 2024-25 financial year. Those being:

  • Up to £12,570 – 0% (Personal allowance)
  • From £12,571 to 5£50,270 – 20% (Basic tax rate)
  • From £52,271 to £125,140 – 40% (Higher tax rate)
  • Above £125,140 – 45% (Additional tax rate)

Let’s look at a hypothetical scenario. If a landlord charged £1,000 a month for rent, and makes mortgage interest payments of £600 a month, the net result for rental income tax would be as follows for each bracket:

Tax bracket Rental income Tax on income Mortgage interest payment Tax relief (20%) Final tax bill
20% £12,000 £2,400 £7,200 £1,440 £960
40% £12,000 £4,800 £7,200 £1,440 £3,360
45% £12,000 £5,400 £7,200 £1,440 £3,960

Under the old system those in the 40% and 45% brackets would have paid less tax. That’s because they could have included their mortgage interest payments before paying tax under their own personal tax allowance.

What does the buy-to-let tax relief mean for landlords?

The buy-to-let tax relief had two important impacts on landlords, depending on how much their income was to begin with:

  1. For landlords in a higher tax bracket, they’ve been able to claim less back as part of their financial expenses on tax returns.
  2. For a handful of landlords on the edge of a bracket, not being able to deduct costs like mortgage interest from their rental income has meant they’re sometimes bumped into a higher tax threshold.

It can be easy to overlook, but the tax relief itself also meant everyone was guaranteed to get 20% of their mortgage interest payments back every year. Without the tax relief, all landlords would be unable to claim any expenses or credits on their interest payments.

Who is and isn’t affected by the buy-to-let mortgage tax relief changes?

These new rules and tax reliefs don’t apply to every landlord. Those who find themselves in the following categories haven’t and won’t be affected by any of the changes:

  • Companies who own properties
  • Land and property dealing or development businesses
  • Commercial lettings
  • Furnished holiday lets

The changes are only aimed at individuals who own residential properties.

Potential ways landlords could manage a loss of income from the buy-to-let tax relief

There’s no right or wrong approach when handling this change in the amount of tax owed. It’s up to a landlord to decide if the loss of income is worth pursuing, or if they can absorb it into their annual expenses.

However, there are ways a landlord can cushion the blow. Any of the following approaches might see a property owner save money across the year.

  • Switching to a cheaper mortgage option. If the interest rate on your mortgage is causing you a headache, it’s possible to shop around for something better. Even a small change in the interest percentage can have a big impact on monthly repayments. Just remember if you change a fixed-rate mortgage early, you may have to pay an extra charge. It could be better to wait for your term to end before swapping.
  • Re-evaluate your buy-to-let insurance policy. Similarly, think about changing your insurance. It could be that your current buy-to-let insurance plan covers more than you need. Saving a few extra pennies every month this way is quick and easy if you compare options.
  • Think about swapping to a cheaper energy provider in the home. If you include a fixed fee for energy bills in the rent you charge, you could look to cut costs here too. Shop around to find an energy bill which is less expensive. It’s another quick and easy change which could have an instant impact.
  • Consider Houses in Multiple Occupation (HMO). HMOs are properties where three or more tenants live, who aren’t part of the same household or family unit. This is a popular option for landlords, as it minimises the individual impact of a missed rental payment. It also gives a landlord the option to set rent per room, rather than per property. This might mean making more in rental income on a monthly basis than if just one household were living there.
  • Consider placing your portfolio in a limited company structure. This slightly more complex option sees landlords create a business. This means they can continue to deduct their mortgage interest payments from their rental income. While that sounds great, there are other factors to keep in mind here:
    • Mortgage rates for businesses tend to have much stiffer interest rates
    • You’ll have to pay an extra round of stamp duty when you transfer ownership of the property
    • Taxes will be more complex, and you’ll have to pay corporation tax on any profits
    • It could be that after these additional points are taken into account, you actually take home less than with the 20% relief credit. This is something to speak to a financial advisor about before making any major decisions.
  • Think about transferring ownership of a property. If your spouse or partner is in a lower tax band, you could transfer ownership of the property to them. Just make sure when doing this that you aren’t accidentally pushing them up into a higher bracket.

How does a landlord claim the buy-to-let mortgage tax relief?

If you do find yourself in a position where you need to claim back the tax relief, it’s important to know how to do it correctly. The process is simple, but it does require a landlord to have all the numbers in front of them.

Making sure to have all the property costs in front of you (the mortgage interest payments you’ve made), go to box 44 on a self-assessment tax return and enter the number. The tax relief will be calculated after you submit your form.

What other buy-to-let taxes do landlords have to pay?

Landlords with buy-to-let mortgages don’t only pay tax on their rental income. There are a handful of other areas where an owner can expect to pay taxes on their buy-to-let property. Some of the most important are:

  • Stamp Duty Land Tax. This fee has to be paid whenever a property is handed over to a new owner. On a buy-to-let mortgage, stamp duty needs to be paid within the first 30 days of your purchase. The amount you have to pay will be broken down like this:
    • 0% on the first £250,000
    • 5% on the portion between £250,001-£925,000
    • 10% on the portion between £925,001-£1.5m
    • 12% on anything over £1.5m

Source: Home Owners Alliance

If you own more than property, as most buy-to-let landlords will, you’ll also have to pay an additional 3% on each of the rates listed above.

  • Inheritance tax. It’s possible to pay inheritance tax on a buy-to-let property if it passes into your hands from a loved one. Here’s how much you can expect to pay:
    • For individuals – Nothing for the first £325,000, then 40% of everything above that
    • For married couples or civil partners – Nothing for the first £650,000, then 40% of everything above that

If a property is passed to you from a spouse or civil partner, you won’t have to pay any inheritance tax at all.

  • Capital gains tax. When you eventually sell your property, you’ll need to pay capital gains tax on the profit you made. This will be taxed at a rate of either 18% or 24%, depending on how much money you made, minus an non taxable allowance on the first £3,000.

    There are ways to reduce your capital gains tax amounts. You can claim back deductions on:
    • Any loss you made on a previous buy-to-let property
    • Solicitor fees
    • Estate agent fees
    • Cost of any advertisements to sell or rent the property
    • The cost of stamp duty
    • Any money spent on “capital items”, such as machinery or equipment

What other expenses can and can’t you deduct from buy-to-let rental income on your tax return?

Your mortgage interest payments might be the largest expense you have on your property, but they won’t be the only ones. It can be handy to know what other types of financial costs are or aren’t allowed to be included as a deductible expense on a tax return.

Allowable expenses:

  • 20% of interest payments on your mortgage
  • Council tax
  • Buildings and contents insurance
  • Small property repairs and maintenance
  • Legal and professional fees
  • Advertisements for new tenants

Expenses you’re not allowed to deduct:

  • The remaining 80% of mortgage interest payments
  • Large home improvements, such as building an extension to a home
  • Any personal expenses which didn’t go towards the property 

The changes to buy-to-let mortgage tax relief shouldn’t put you off finding out more about this handy home ownership scheme. Make sure to shop around and find the best rate for a buy-to-let mortgage if you’re thinking about applying for one.