Buy-to-let has become a massive incentive for people looking to make investments over the years, especially in a country where cities are vastly populated by students and more people choosing to rent as opposed to buying. It’s an excellent way of increasing your income whilst also investing for the future.


In 2015, the annual Budget announced a substantial change in how much of their mortgage interest landlords would be able to offset against tax. Previously, landlords were allowed to remove any mortgage interest payments they made before calculating their tax bill, ensuring that only profit was taxable, as opposed to turnover. Significant savings could be made here, especially considering how the vast majority of landlords choose to take out interest-only mortgages. These new changes ensure that landlords aren’t given an unfair advantage over homeowners, allowing the tables to turn on purchasing and opening the doors to first-time buyers who were previously competing with buy-to-let landlords for the same properties.


Here’s what landlords need to know:


What does this mean?

Naturally, the changes will be carried out over a 2-year time period. Returns for the 2017/18 tax year, landlords will be able to claim tax relief on 75% of the interest accrued on their mortgage. An additional 20% will be given to them in the form of a tax credit, on the rest of their mortgage interest payments. For the 2018/19 tax-year, this relief is reduced further to 50% and then finally to 25% in 2019/20, until eventually landlord tax relief is rebutted entirely, instead being replaced by a 20% tax credit. Higher-rate tax payers will be most affected, but may also mean that basic rate payers may be forced to declare a higher income. To summarise changes for basic rate payers: as long as your income, including any full-time work you do and any income you receive from letting out your house, remains below £45,000 per annum, there will be no difference in the income tax that you pay between now and 2020, when the changes fully come into place.


What could I do?

There is one thing you could do, if your post-tax profit falls beyond an acceptable measure. As the new tax rules apply onto to individual landlords and not limited companies, creating a limited company and selling your buy-to-let properties to the company ensures that these relief changes are avoided. However, doing so would trigger additional charges elsewhere so unless you’re planning on owning the property for a long time, the initial start-up costs may well outweigh the benefits. Some landlords are choosing to increase the rent on their properties, but in an economy where the vast majority of people are already living at the top end of their budget, this is not necessarily a good move- this runs the risk of landlords pricing themselves outside of the market and consequently losing tenants.