Buy to let tax changes: what you need to know

by Leeds Building Society

Warning: THE MORTGAGED PROPERTY (WHICH MAY BE YOUR HOME) MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

With the beginning of the new tax year on 6th April 2017, there were some changes to how buy to let landlords are taxed on their earnings.

Before the 2017/18 tax year, buy to let landlords could offset mortgage interest from the rental income when calculating profits. This means they only paid tax on earnings after their mortgage interest was subtracted from their rental income before calculating the tax due.

That’s now changed. The amount of mortgage interest that’s tax deductible will be scaled down. In 2020 the amount of tax deductible interest will be capped at 20% - even if your earnings from rent haven’t increased.

2017 75% of mortgage interest against profits are deductible
2018 50% of mortgage interest against profits are deductible
2019 25% of mortgage interest against profits are deductible
2020 Tax deductible mortgage interest replaced by tax credit

 

Although the changes will mainly affect higher rate income tax payers, some basic rate payers will be pushed into a higher tax bracket when their rental income is added to their income.

The changes will only affect individual landlords, not limited companies.

There are also changes to wear and tear tax deductions. Where previously all landlords could deduct 10% of their tax for wear and tear (regardless of whether they spent any money on improvements) a new scheme means that landlords can only deduct actual expenses.

These changes arrive on the back of the new stamp duty structure that was introduced in 2016, which meant that anyone buying an additional property had to pay an extra 3% in stamp duty, depending on property prices.

Property priceStamp duty rateStamp duty rate on additional properties
£0-£40,000 0% 0%
£0-£125,000 0% 3%
£125,001-£250,000 2% 5%
£250,001-£925,000 5% 8%
£925,001-£1.5m 10% 13%
£1.5m+ 12% 15%

 

This guide is intended as a summary only and does not constitute financial or legal advice given by Leeds Building Society. No reliance should be placed on this guide and you must make your own decisions. We recommend that you seek independent legal and/or financial advice if you have any questions or queries.