Landlord Tax Changes – A Comprehensive Guide

At Residential Estates, it is our priority that we can help our investor and landlord clients through what can sometimes be a confusing minefield of rules and regulations. At the beginning of 2019, changes to tax regulations for landlords were brought in, and with further changes expected in 2021, we have written a comprehensive guide to ensure you know the essentials about landlord tax changes.


Who Is Affected by The New Landlord Tax Changes?


If you are a landlord that lets residential property in the UK as an individual, you will be affected under the following circumstances:

  • You are a resident in the UK with property in the UK or overseas
  • You are an overseas resident and you let property in the UK
  • You let your property in partnership
  • You are a trustee or beneficiary of a trust


Who Is Not Affected by The New Landlord Tax Changes?


There are certain circumstances where landlords will not be affected by the tax changes. These include:

  • The property is owned by a UK-resident company, and not an individual
  • The property is owned by a non-UK resident company
  • The property is a fully furnished holiday let


What Has Changed?


Before the landlord tax changes, a landlord would have a simple tax calculation relating to mortgage expenses and simply deduct the mortgage interest from any rental income. This method was phased out from April 2017, which has led to many landlords paying a higher amount in tax.

The changes will continue with a phased reduction in tax relief over the next few years, up until 2021.

The changes mean that a basic rate tax reduction of 20% will be applicable to whichever is the smallest from:

  • The finance costs of the property – the total interest on mortgage, any loans or overdraft
  • The profits of the property – net rental income
  • The adjusted total income – any earnings after losses have been deducted, personal allowance and tax relief

What this means is that tax relief is given as a reduction in tax liability, rather than a reduction to income that is taxable. At face value, this could be considered a subtle change, but one that can have a big impact on your tax bill.


Phased Introduction of Section 24 of the Finance Act


The tax year for 2017/2018 was the first to be affected by Section 24 of the Finance Act. Landlords will now have to deduct 75% of interest cost, with a 20% tax credit on the remaining balance. As part of the phased changes, for the tax year ending 5th April 2019, landlords will be able to deduct 50% of interest cost, and only 25% in the year ending 5th April 2020.

From 2021, there will no longer be any deduction from interest costs for landlords, with the 20% credit on the whole amount remaining. The changes could end up pushing people into the next tax bracket, due to the rental income being added prior to the tax credit being used.

What Has Been the Impact to the New Landlord Tax?

Buy-to-let has changed in several ways in recent years, with the government introducing several changes that could potentially squeeze private landlords with higher taxes and lower profits. These other changes include:

  • 3% surcharge on stamp duty payable on new buy-to-let purchases from April 2016
  • Landlords with four or more mortgaged properties were put under tighter regulations in October 2017 to aim to keep down debt levels
  • Bank of England clamped down on mortgage lenders – with landlords required to pick up a much higher ratio of rental income compared to their mortgage payments

The initial impact of the recent changes was for landlords to begin selling property. This was noticed by the end of 2017, with up to 3,800 properties being sold a month during that year. The downward trend has continued but with professional assistance and guidance from property experts, landlords can plan in a smart and clever way to ensure that strategies are adjusted accordingly. Ultimately, the demand for housing and the demand for quality rented accommodation in the UK is not going away. With less inexperienced landlords in the market, there is a huge opportunity to invest wisely now while the market adjusts and benefit in the future.

The team at Residential Estates always keep an eye on the property market and all legislative changes in order to provide you with up-to-date, accurate information. If you are interested in talking to us about property investment opportunities, or about anything to do with current landlord and tax legislation that may impact your property investment, we can certainly help. You can reach us by calling 01244 343 355 or email sales@residential-estates.co.uk and we will return to you at your convenience.

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