Buy to let mortgage tax relief for landlords - 2021 Guide

Under the new rules for rental property put in place in April 2020, buy-to-let landlords are losing tax relief on their mortgages. With these changes in place, it’s vital to understand how this affects your taxes. Our guide to buy to let mortgage tax relief for landlords in 2021 explains what these new regulations mean for you.

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

Previously, until to the tax year of 2016/2017, buy-to-let landlords were able to deduct mortgage interest and other expenses from their rental income. These deductions were made prior to calculating their tax liabilities, giving landlords the advantage of paying lower tax. From April 2020, tax relief is no longer calculated based on taxable rental income and will only be given as a reduction in tax liability.

What does the loss of buy to let tax relief mean?

Without buy-to-let mortgage tax relief for landlords, tax relief for finance costs is restricted to the basic rate of income tax, which is 20%. This is a fixed rate for all buy-to-let landlords. Those previously able to claim more may see an increase in their tax bills.

What’s changing in landlord tax relief?

As of April 2020, buy-to-let landlords cannot deduct mortgage expenses from rental income. The new rule is that landlords receive a tax credit instead, which is calculated according to 20% of your mortgage payments. These new regulations have been gradually introduced in the last three tax years, but there are still financial repercussions for buy-to-let landlords.
Many landlords are now paying increased mortgage interest payments and a higher tax bill due to the changes in buy-to-let tax relief. The changes in tax relief also having an effect on the property market and buying to rent is becoming less lucrative, and less appealing.

How loss of buy-to-let tax relief will affect you

The landlords who are most affected are those who were previously entitled to higher deductions. Higher tax payers used to be able to receive up to 40% tax relief on their mortgage payments. The rate is now fixed at 20% according to the basic rate of income tax. It, therefore, now depends on your earnings, as to whether the changes will affect you.

If you’re a landlord and feel you will be affected by the changes to buy-to-let mortgage tax relief, there are a few options. You could get lower interest rates by opting for short-term fixed rate mortgages. These are slightly more risky, however. Another two options are to either transfer the ownership of your property to a spouse on a low tax bracket, or into a limited company structure. Both of the options are complicated and will incur other charges such as stamp duty, taxes, and dividends.

Is this bad news for landlords?

The changes mostly affect landlords on a higher tax bracket. The one positive is that there’s no longer a disadvantage for landlords on a lower income. It’s more problematic for higher rate taxpayers as the tax relief will be significantly decreased. Landlords could also end up in a higher tax bracket because they’ll be required to declare any income used for mortgage payments on their tax return.
New landlords are less likely to be affected as they will have to start at the fixed rate, and budget for this. It’s more of an issue for landlords under the previous scheme who will lose more in mortgage interest payments than in the past. If you’re considering investing in a buy-to-let property, you should speak to a financial advisor in order to calculate your taxes, and understand if it’s a worthy investment for you.

How Will the Changes to Buy-to-Let Tax Affect the Rental Property Market?

The changes to buy-to-let mortgage tax relief are likely to affect the rental property market. Whereas previously renting out a buy-to-let property was a lucrative investment, it’s now beginning to lose its appeal. These changes are being implemented as part of the government’s attempt to reform the private rental sector. Whereas the new scheme will improve the situation for renters, it will have a negative effect on the finances of many buy-to-let landlords.

Can landlords incorporate to keep their mortgage interest relief?

Incorporating your taxes is a complex issue. It is, however, possible to declare rental income after deducting the mortgage, but mortgage rates are typically higher for businesses. If you decide to set up a business to rent property, rather than as a private landlord, there will also be additional costs even though you’ll receive the rental income tax relief. These include the stamp duty required to transfer ownership to a company, corporation tax, and dividends. It’s recommended to speak to a mortgage advisor to find out whether this option will benefit you financially or not.

COVID-19 Tax updates

There have been several tax updates in order to protect small businesses and the self-employed that have been affected by the COVID-19 pandemic. These include deferring self-assessment payments, and the self-employed income support scheme. The government has also introduced schemes to protect workers, particularly the coronavirus job retention scheme (furlough).

Get expert tax advice

If you’re a landlord and have been affected by the changes to buy-to-let mortgage tax relief, it’s a good idea to get expert tax advice. The new regulations could affect your overall income and tax bill. Speak to a financial advisor and find out the best option for you. Remortgaging your property or transferring ownership both have their pros and cons, even though there might be the opportunity to increase your buy-to-let mortgage tax relief. For more advice on buy to let mortgage tax relief and further help with your rental properties, get in touch today.