Landlord tax relief changes explained

How might upcoming changes affect the UK’s landlords?

Landlord tax relief changes explained

How might upcoming changes affect the UK’s landlords?


The way landlords calculate tax relief on their mortgages is set to change in 2017, with some landlords expected to pay more tax as a result.

The changes are to be phased in gradually until 2020, starting from 6 April 2017. However, while the UK Government has claimed that 82% of landlords won’t be impacted, our research showed that over 40% of landlords believe they will have to pay additional tax as a result of the changes.

So why the confusion?

To help you better understand the Government’s plans, here’s a look at how three different example landlords across the country, with varying levels of income, might be affected.

Marie

Marie

'The Accidental Landlord'

1 x

Find out how
the changes affect Marie

Martin

Martin

'The Part Timer'

2 x

Find out how
the changes could affect Martin

Michael

Michael

'The Professional'

6 x

Find out how
the changes could affect Michael

These examples are fictional and are not based on any individual persons. The amounts cited are for illustrative purposes only, using fictional numbers. The calculations have been made following the Government’s example, which can be found here. All calculations are based on 2017 tax rates and allowances.

Marie

Marie

'The Accidental Landlord'

1 x

Find out how
the changes affect Marie

Martin

Martin

'The Part Timer'

2 x

Find out how
the changes could affect Martin

Michael

Michael

'The Professional'

6 x

Find out how
the changes could affect Michael

These examples are fictional and are not based on any individual persons. The amounts cited are for illustrative purposes only, using fictional numbers. The calculations have been made following the Government’s example, which can be found here. All calculations are based on 2017 tax rates and allowances.


Marie, The Accidental Landlord

Meet Marie

'The Accidental Landlord'

Location: Glasgow
Income: Works full time, earning £26,500 per year
Landlord experience: None
Properties: One

Meet Marie

'The Accidental Landlord'

Location:
Glasgow
Landlord experience:
None
Income:
Works full time, earning £26,500 per year
Properties:
One
Marie, The Accidental Landlord

After moving in with my boyfriend, I decided to let out my own flat as a way of helping pay off the mortgage. I never really planned on being a landlord until now, so I’m not sure how these changes will affect me.

Even if, like Marie, your landlord duties are very much ’on the side‘, it’s still important you understand the tax changes that are being phased in from 6 April 2017 – especially if your circumstances were to change. The changes will affect how Marie reports her earnings and could mean she pays more income tax.

The cost for Marie

Let’s assume Marie earns a pre-tax salary of £26,500 in a full-time job, plus £9,000 per year from a rental property, and pays £2,400 mortgage interest annually. Here’s how the amount of tax Marie pays could be affected over the course of the four years.

YEAR TAX
17/18 £4,320
18/19 £4,320
19/20 £4,320
20/21 £4,320

You can see how these calculations were made and learn how to work out your expected income tax for yourself using the UK Government’s explainer guide, available below.

How Marie is impacted

Because Marie’s income does not exceed £45,000 per year, she is one of the estimated 82% of landlords unaffected by the changes. So long as her total income, including rent, doesn’t exceed £45,000 per year, she won’t see a difference in the income tax she pays.


Martin, The Part Timer

Meet Martin

'The Part Timer'

Location: Manchester
Income: Works full time, earning £34,000 per year
Landlord experience: Three years
Properties: Two

Meet Martin

The Part Timer

Location:
Manchester
Landlord experience:
Three years
Income:
Works full time, earning £34,000 per year
Properties:
Two
Martin, The Part Timer

I bought additional properties specifically to let them out to tenants. I’m planning for my future, and buy-to-let is my nest egg for retirement. I’ve read a bit about these changes and I’m worried I’m going to be worse off.

If renting out residential properties is a significant sideline that supplements your main income, you could be hit by the upcoming changes to buy-to-let tax relief.

The cost for Martin

Let’s assume Martin earns a pre-tax salary of £34,000 from a full-time job, plus £11,500 per year from his two properties, and pays £3,600 mortgage interest annually. Here’s how the amount of tax Martin pays could be affected over the course of the four years.

YEAR TAX
17/18 £6,080
18/19 £6,080
19/20 £6,080
20/21 £6,180

You can see how these calculations were made and learn how to work out your expected income tax for yourself using the UK Government’s explainer guide, available below.

How Martin is impacted

Martin is unaffected by the changes until the final year of the transition. That’s because until then, he is allowed to deduct enough of his personal finance costs to keep him under the £45,000 higher rate income tax threshold.

Because the changes could push Martin’s taxable income up it could also:


If you’re in Martin’s position and you want more information on the background to these changes, click here.


Michael, The Professional

Meet Michael

'The Professional'

Location: London
Income: Full-time landlord, earning £110,000 per year
Landlord experience: Ten years
Properties: Six

Meet Michael

The Professional

Location:
London
Landlord experience:
Ten years
Income:
Full-time landlord, earning £110,000 per year
Properties:
Six
Michael, The Professional

I was fortunate enough to recently inherit a portfolio of properties, which means I don’t need to have another job. I’m worried about how the changes are going to affect my sole source of income and my ability to continue paying the leftover mortgages.

If, like Michael, renting out residential properties is your main source of income, the buy-to-let tax changes being phased in from April 2017 could have a big impact on your bottom line.

The cost for Michael

Let’s assume Michael earns £110,000 per year from rental income, and pays £27,000 mortgage interest annually. Here’s how the amount of tax Michael pays could be affected over the course of the four years.

YEAR TAX
17/18 £23,250
18/19 £24,600
19/20 £26,600
20/21 £29,300

You can see how these calculations were made and learn how to work out your expected income tax for yourself using the UK Government’s explainer guide, available below.

How Michael is impacted

Because of the large number of properties Michael owns and the income he receives as a result, the changes could push Michael’s taxable income up considerably.

This means that, for landlords like Michael, managing finances and other allowable expenses will become an even more important part of your rental experience.

If you’re in Michael’s shoes and you want more information on the background to these changes, click here


These changes explained


Some background

At present, the interest on your mortgage, and on loans or overdraft used to fund purchases for your property, can be deducted from your earnings, reducing your tax bill.

However, from 6 April 2017, the Government is changing income tax relief for residential landlords to try to prevent the highest earning landlords from receiving the biggest income tax relief. This won’t affect registered companies or landlords of furnished holiday homes.

The changes†† were first announced by then-Chancellor George Osborne as part of his post-election Budget in 2015. If you’re not a registered company, and rent to residential tenants rather than letting a furnished holiday home, these new changes will be phased in over four years, beginning in April 2017.

What’s changing?

From April, the existing system will be replaced by a basic rate tax reduction of 20% of whichever of the following is smallest:

  • Finance costs: total interest on mortgage, loans or overdraft.
  • Property profits: net rental income.
  • Adjusted total income: earnings after deducting losses, tax relief and personal allowance.

As a result, tax relief will be given as a reduction in tax liability instead of a reduction to taxable income.

The transition

The changes aren’t coming in one go. Instead, the Government plans to phase the changes in over time. This means that, for a time, both the old and new methods for calculating income tax relief will apply to varying degrees.

The split between the existing method of personal finance deduction and the new 20% basic rate reduction will be worked out as follows:

  Existing method New method
2016-17 100% 0%
2017-18 75% 25%
2018-19 50% 50%
2019-20 25% 75%
2020-21 0% 100%

So for example, in 2017-18 landlords will be able to deduct 75% of their personal finance costs. However, they will also receive 25% of the final basic rate tax reduction (in other words a quarter of the 20% deduction in the new method).

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Based on AXA research of 382 UK landlords conducted in March 2017

The examples in this article are fictional. The amounts cited are for illustrative purposes only, using fictional numbers. Calculations are not based on any individual persons.

†† Analysis of changes for landlords taken from UK Government information available at: https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords