Ladybird Living – Your London Estate Agent

Ladybird Living
Oct 04 2022

Changes to Buy to let tax relief

Those who were property owners and who had a mortgage on their property before April 2017 were able to deduct any interest from their rental income before they paid tax on it. However, there have been some changes to the buy-to-let tax relief in 2020. This blog will discuss the changes to the buy-to-let tax relief and its impact on the future of property owners. 

Since April 2020, property owners have no longer been able to deduct any of their mortgage expenses from their rental income to reduce their tax bill. Instead, property owners receive a tax credit based on 20% of their mortgage interest payments. This means that a property owner getting £10,000 in rent and paying £9,000 in mortgage interest payments will end up paying tax on the entire £10,000 – though the amount will still depend on their tax bracket.  

They will then be able to deduct £1,800 from their tax bill due to the 20% tax credit, leaving them with the final overall tax bill on their rental income. This is less generous than the old system for higher-rate taxpayers. If you are a basic rate taxpayer with a 20% tax rate, you will not pay more tax under the new rules. However, the tax impact of the new interest deduction rules will significantly increase the tax bill for higher-rate taxpayers. In 2020, a higher rate taxpayer would pay £2,160 more tax. 

How do the changes to the buy-to-let tax relief affect the future of property owners?  

The recent changes will primarily affect private and individual property owners. The changes mean that it is now essential that property owners declare the rental income that they use for interest payments which means that they could find themselves in a higher tax bracket. Additionally, the recent changes to the buy-to-let tax relief also increases the risk for negative earnings because some property owners who have smaller profit margins may lose money after tax.  


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