Why Buy-to-Let Incomes are Dropping
When George Osborne was Chancellor of the Exchequer, he wanted to find ways of solving the housing shortage and get more people on the property ladder.
If you wanted to buy a home to live in, he reasoned, you faced unfair competition from buy-to-let landlords. Unlike them, you couldn’t (for tax purposes) offset your mortgage interest payments against income from the property.
So, in 2015, he decided to change the rules. A new act of parliament said that, from the tax year 2017-2018, the amount of ‘finance costs’ that landlords could claim against property income would begin to fall (if they paid higher or additional rate income tax).
What are ‘finance costs’?
‘Finance costs’ is an umbrella term covering a range of expenditure made by buy-to-let landlords. The most significant cost is mortgage interest, but others in the same bracket include:
- Interest on certain loans (such as to buy furnishings)
- Interest on overdrafts
- Fees and costs incurred for obtaining or repaying mortgages and loans
This list is by no means comprehensive – if you need learn what other expenditure counts as a ‘finance cost’, we recommend you speak to a THP accountant.
How the amount you can claim is dropping
Until the tax year 2016-17, you could deduct 100% of finance costs from your property income. In 2017-18, this dropped to 75% and the following year it fell to 50%.
For 2019-20, you can deduct 25% and then, from 2020 onwards you can’t deduct any finance costs from your property income.
What you can claim instead
As relief on finance costs has been phased out, a system of tax credits has been phased in. In 2019-20, you can claim a 20% tax credit on 75% your mortgage interest (with the other 25% being deductible from property income). From 2020 you will only be eligible for a tax credit of 20% on your mortgage interest.
This is a much worse deal for higher and additional rate taxpayers. The credit refunds tax at the basic rate of 20%, rather than at the top rate of tax you pay.
How much your income from buy-to-let will drop
The amount your income will drop will depend on your portfolio, the amount of rent you receive and the mortgage interest you pay. Let’s take a simplified example of a higher-rate taxpaying landlord who each month receives £1,150 in rent and pays £700 in mortgage interest payments.
Before April 2017, they would have had a tax bill of £2,160, leaving them with a post-tax mortgage and rental income of £3,240. From April 2020 that will change to a whopping tax bill of £3,840, leaving them with only £1,560 after tax. A reduction of £1,680 per year.
In other words, this landlord’s income would drop by £1,680 for every tax year thereafter – and that’s only taking into account the phasing out of mortgage interest relief and not any other claimable ‘finance costs’!
More bad news – changes to Stamp Duty.
From 1st April 2025, there has been more bad news for landlords wanting to expand their portfolio. Anyone buying a second home or a buy-to-let property from 30 October 2024 now has to pay an additional 5% in Stamp Duty Land Tax (SDLT). This was 3% up to 29th October 2024.
The SDLT tax bands from 1 April 2025 will look like this:
| Price bands | Standard rate | Buy-to-let/second home rate |
| Up to £125,000 | 0% | 5% |
| £125,001 - £250,000 | 2% | 7% |
| £250,001 - £925,000 | 5% | 10% |
| £925,000 - £1.5m | 10% | 15% |
| over £1.5m | 12% | 17% |
So, if you purchase a buy-to-let property for £300,000, you will have to pay 5% SDLT on the first £125,000, £7% on the next £125,000 and 10% on the next £50,000.
That means you will pay £20,000 SDLT.
My buy-to-let income has dropped. What can I do?
There are ways you can minimise the dent that legal changes have made to your buy-to-let income, but they depend on many different factors – such as the size of your portfolio, whether you are married, whether you are a basic or higher rate taxpayer and more. While many landlords have heard that it’s a good idea to switch the management of their properties to a limited company, this is in fact not a good solution for many people – especially if they hold small portfolios.
THP accountants can advise you on the best tax structures and strategies for your portfolio, but to learn a more about them now, please read the other pages in this series – you’ll find a list of topics below.
More in this series:
- Making Buy-to-Let More Profitable
- Why Buy-to-Let Incomes are Dropping
- Should I transfer my BTL properties into a limited company?
- Married Landlord? You could reduce your tax bill.
- Strategies for improving Buy-to-Let income
- Personal Buy-to-Let mortgages & re-mortgages – the facts
- Selling your BTL property – things to look out for
- How THP can help you as a Landlord
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The information included on this page should be regarded as general advice only. You should always seek professional advice tailored to your own specific circumstances before taking any action based upon it.
