Should buy-to-let landlords keep more for tax from April 2018?

From this month (April 2018), if you’re a landlord with a mortgaged rental property you need to be aware that you may now have to pay more on your rental income due to changes in mortgage interest relief changes.

Mortgage interest tax relief had allowed buy to let landlords to declare rental income only after they had paid the mortgage on their rental property, cutting tax bill by potentially thousands of pounds per year. However, in the Summer Budget of 2015 it was announced that mortgage interest tax relief was being phased out.

From 6th April 2020, tax relief will be restricted to the basic rate of income (20%) and will be given as a tax liability instead of a reduction to taxable rental income. This also means that those basic rate taxpayers could find that they are pushed into a higher tax band. This means that those landlords who are already higher rate and additional rate taxpayers will inevitably end up paying more tax. It’s likely that those landlords only making a small net amount could find themselves experiencing negative cash flow.

From April 2018 landlords with buy-to-let mortgaged rental property will need to pay tax on 50% of their total rental income, as detailed below:

Understanding mortgage tax relief changes for landlords

Probably the most important thing landlords need to remember is if you've got a mortgage, you're probably going to have to pay more in tax and that money has to be available when tax is due. That’s not going to be easy for every landlord, especially those on tight budgets making small incomes or who currently lose money on their rental property.

This is an example of how a 40% taxpayer could be impacted by the change in tax legislation - please bear in mind this table is for illustrative purposes only:

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^{The table above is for illustrative purposes only and relies on a number of assumptions and doesn't cover all circumstances and scenarios. Please speak to a qualified accountant to determine how the mortgage relief tax changes impact your tax circumstances.}