Buy to let tax relief for landlords with mortgaged property explained

As a landlord or a property investor, you will need to know and understand the various different forms of tax relief that are available along with how they work. Along with this you will need to know what the changes in these reliefs will mean to your property and your mortgaged property income.

In this guide, we’ll explain how buy-to-let tax relief for landlords with mortgaged properties works.

Buy-to-let mortgage interest tax relief key point

Under the newest set of buy-to-let mortgage interest tax relief rules that came into effect as of the start of the tax year in April 2020, landlords will start to lose valuable tax relief on their buy-to-let mortgage costs.

But what are these changes and how will they affect you as a landlord?

Firstly, as of the start of the 2020-21 tax year, you will no longer be able to deduct any of your mortgage expenses from your tax bill. Instead of this, you will receive a tax credit. This will be based on 20% of your total mortgage interest payments.

If you are a higher-rate taxpayer, this will affect you dramatically. Previously, under the old rules, you would have received a 40% tax relief on mortgage payments under the rules that used to exist. If you were an additional-rate taxpayer, the previous rules would have seen you receiving a 45% tax relief.

This was brought in a few years ago, however, it has been phased in over the last few years. The changes have been gradual.

For the 2019-20 tax year, you were able to deduct a quarter of your rental income, while the remaining 75% of your mortgage interest payments will have received the tax credit.

Are you affected by any of these changes?

There are several different ways that you may be affected by these changes to tax relief rules for landlords with a buy-to-let mortgage.

You will be affected by these changes if you are an individual who resides in the United Kingdom and that lets out residential properties either within the United Kingdom or overseas.

You will also be affected if you are not a resident of the United Kingdom, but you currently let out residential properties within the United Kingdom.

This will also affect you if you are an individual who lets out properties in partnership with someone else or if you are a trustee or a beneficiary of trusts available for income tax on profits from a property.

If you are a landlord with finance costs such as a mortgage, this will affect you. The new rules will affect some people more than others, with some landlords paying more tax.

There are some landlords that won’t be affected by the changes in these tax rules. For instance, if you are a company that is based in the United Kingdom, or that is not. This also does not apply to landlords of furnished holiday properties that are let out. In these cases, you will continue to receive relief for mortgage interest and other finance costs in the same way as you used to.

Your landlord’s tax bill could increase

Under the new system, there are two ways in which your tax bill could increase. Firstly, if you are a higher-rate or additional-rate taxpayer, then you won’t be able to get all of the tax back on your mortgage repayments. The tax credit that is available, only refunds tax at the basic rate of 20%, rather than at the 40% rate for higher-rate taxpayers, and the 45% rate for additional-rate taxpayers.

Secondly, and possibly less obviously, you may find yourself being forced into a higher tax bracket. This is because you will need to declare the income that would have been used to pay your mortgage on your tax return. In many cases, this could push your total income into the higher tax bracket (which is £50,000 for the 2020-21 tax year) or the additional rate tax bracket (which is £150,000 for the 2020-21 tax year) This will depend on your income from other sources. For example, if you earn a salary or a pension.

Can landlords set up a limited company to keep their mortgage interest relief?

The current changes in tax relief for landlords with mortgaged properties only will affect private landlords. This means people that own their buy-to-let properties themselves as individuals (or as a couple), rather than as a business.

In principle, you could set up your own business that owns its own rental properties. That way, as a landlord, you will be able to continue to declare a rental income after the mortgage has been deducted.

It is essential that you do some research into this if this is a route that you plan on taking. Even with this tax saving, you may still be worse off.

There are several different reasons for this. The main reason is that mortgage rates for businesses are much more expensive than they are for private landlords. In the long run, this may end up costing you considerably more than you might have saved in the higher tax relief.
You will also need to pay additional stamp duty when you transfer the property’s ownership from yourself as an individual, to your business.

Finally, if you were to incorporate and become a limited company, then your taxes would become dramatically more complicated. Instead of paying income tax on your rental income as you may have done when you were an individual acting as a landlord, you will need to concern yourself with filing taxes for your business, and paying additional corporation tax on your profits.

If you were to receive the rental income, you would need to pay yourself as a dividend. You will then be taxed on this as though it were an income, but at the lower rate of tax than if you would have received the income directly.

What are the advantages of an SPV?

SPV stands for special purpose vehicle, this is a type of limited company which could be used by landlords as a way of improving their tax efficiency.
An SPV is a type of business that is set up for a specific, well-defined purpose.

If you are a property investor, then you could use an SPV as a vehicle for the purchase of your buy-to-let property

When it comes to property investment, the main reason that investors will choose to set up a special purpose vehicle is for the tax benefits that it brings.

In 2015, the Finance Act brought in changes to the way that the tax reliefs worked. There were restrictions put in place on the amount of interest that you can claim as part of your tax allowance. This amount has gradually been lowered in the years that follows and is now zero.

For the 2020-21 tax year and for the future, rental profits will be taxed with the maximum deduction at the basic rate of 20%. This has increased the tax liability for many landlords and property investors, and as such many people have found that their operating costs have risen meaning that buy-to-let investments are no longer attractive prospects or as viable as they once were. In fact, for many landlords, these new changes could lead to a loss.

That said, limited companies are still able to claim a tax relief on any of the interest that they pay on their mortgages. Running your property investment or letting operation as a limited company is a more effective and much more financially viable way of running a property business.

Mortgage lenders like limited company special purpose vehicles as there is an easy to understand risk attached to them. For example, a brand-new special purpose vehicle which has been set up for a property project won’t have any kind of trading history. As a result of this, there will be no existing debts or charges that could jeopardize the lending decision.

Around three-quarters of all buy-to-let mortgages are currently available to individuals. This means that 25% are available to special purpose vehicles. This does mean that there are less mortgages available to you, if you choose to go down the route of setting yourself up as a limited company.

While a special purpose vehicle will work under the current legislation, it is vital to note that as with all legislation, it is subject to change.

Buy to let tax relief advice

Finding your way around the maze that is buy-to-let tax relief can be difficult, but fortunately, we are here to help you. We are experts in buy-to-let tax relief and can provide a range of advice and services.

If you need buy-to-let tax relief advice, then contact us today.

  • Tags: