Tax relief on buy-to-let mortgages: a Landlord’s guide

Buy to let mortgages are mortgages taken out by landlords to finance their rental properties which are important as they allow landlords to expand their property portfolios and generate income from rent payments. However, the rules surrounding tax relief on mortgage interest payments for landlords have recently changed, and it’s important for landlords to understand these changes to avoid being caught off guard by unexpected tax bills. In this guide, we’ll walk you through the changes and provide advice on how to mitigate their impact.

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What is tax relief on mortgage interest payments?

Tax relief is a reduction in the amount of tax that you owe. In the case of buy to let mortgages, tax relief applies to the interest payments on the mortgage. Landlords can claim tax relief on the interest they pay on their mortgages, reducing their overall tax bill.

The amount of tax relief you can claim depends on your tax bracket. Basic rate taxpayers can claim tax relief on the entire amount of interest paid, while higher rate taxpayers can claim relief on 20% of the interest paid. For example, if a basic rate taxpayer pays £10,000 in mortgage interest, they can claim back £2,000 in tax relief. If a higher rate taxpayer pays the same amount, they can only claim back £1,600 in tax relief.

Changes to tax relief on mortgage interest payments

In April 2020, the rules around tax relief on mortgage interest payments for landlords changed. Under the new system, tax relief is only available at the basic rate of 20%. This means that higher rate taxpayers will see a reduction in the amount of tax relief they can claim.

After the 2020-21 tax year, landlords will only be able to claim tax relief at the basic rate of 20%, regardless of their tax bracket.

How to mitigate the impact of the tax relief changes

There are several options available to landlords to reduce the impact of the changes on their tax bills. One option is to incorporate as a limited company. Limited companies pay corporation tax, which is currently set at a lower rate than income tax. This can help reduce the tax bill for some landlords.

Other options include increasing rental income, reducing expenses, or selling properties. However, it’s important to seek professional advice before taking any of these steps to ensure that you are complying with all tax laws and regulations.

Getting professional advice

Seeking professional advice is crucial to ensure compliance with tax laws and regulations. A tax expert or consultant can provide advice on the best course of action for your individual situation, helping you to make informed decisions that will minimise your tax bill.

Professional advice can also help you identify potential cost savings. For example, a tax expert may be able to identify expenses that you were not aware of or provide advice on the most tax-efficient way to structure your property portfolio.

Conclusion

In summary, the changes to tax relief on mortgage interest payments for landlords can have a significant impact on your tax bill. It’s important to understand these changes and to take steps to mitigate their impact. Incorporating as a limited company, increasing rental income, reducing expenses, or selling properties are all options that may be available to you.

However, seeking professional advice is crucial to ensure that you are complying with all tax laws and regulations and to identify potential cost savings. As a landlord, it’s important to stay informed and to take the necessary steps to manage your tax bill effectively.

Free Landlord Resources

Free Instant Valuation

See how much your property could get in rent.

Fee Saving Calculator

See how much you could save on property fees.

Yield calculator

Calculate your rental yield with our simple tool

Compliance checklist

Make sure your buy-to-let property remains legal.

Compliance Guide

Download your complete landlord compliance guide 

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Sam has a wealth of experience across the private landlord and Build to Rent sectors. He has advised a wide range of clients across the whole of London on how to find great tenants, improve their assets and effectively market their properties for the best returns.

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