Tax relief changes

Tax relief changes for landlords

Tax information is based on our understanding of the proposed tax legislation as at 16 January 2017, and may be subject to change.


No information on this site should be taken as tax advice. For advice your clients should consult with an independent tax adviser.


At present, landlords can deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.


From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.



The changes will be phased in from April 2017, as the table below shows.

Tax relief on finance cost 2016/17 2017/18 2018/19 2019/20 2020/21
Existing system
100%
75%
50%
25%
-
New system
-
25%
50%
75%
100%

See a more detailed example of how this phasing could affect a landlord’s net profit.

Tax relief changes calculator

We’ve developed a tax relief changes calculator that you can download and share with your clients. This will help them understand how their profits could be affected over the next few years as the changes are phased in.

Download calculator


Key changes

In summary:

  • The changes are effective from the 2017/18 financial year and will be phased in over four years.
  • Mortgage interest tax relief will be limited to the basic rate of tax, currently 20%, and given as a reduction in tax liability instead of a reduction to taxable rental income.
  • The changes mean that the basic rate tax payers could find themselves pushed into a higher rate band as a result
  • There’s no impact on tax liability for landlords who remain as zero or basic rate payers, after calculating taxable income under the new rules
  • Other allowable costs, on an actual cost basis, can still be deducted from gross rental income for the purposes of determining taxable income.

Potential impacts:

  • Higher rate and additional rate tax payers will pay more in tax, as tax relief on mortgage interest will be limited to the equivalent level of a basic rate tax payer (currently 20%)
  • With taxable income now being calculated without a deduction for finance costs, some landlords may experience an upward movement in tax bands
  • It could be possible that some landlords currently making a small net profit will experience negative cash flow after tax.
Helping your clients understand if they're impacted
Most impacted
  • Existing higher rate tax payers (40% and 45%)
  • Landlords with marginal rental cover (high mortgage costs relative to rental income)
  • Tax payers moving into the higher rate tax band as a result of the changes
  • Landlords with strong rental cover


  • Lower rate tax payers remaining in the same band and unencumbered landlords are unaffected.
Examples - How your clients profitability could be affected

To help you and your clients understand how the changes could affect them, we’ve calculated the following scenarios.

We’ve also developed a tax relief changes calculator that you can download and share with your clients. This will help them understand how their profits could be affected over the next few years as the changes are phased in.

All figures used in the following examples are for illustrative purposes only. Your clients should seek independent tax advice if they’re uncertain as how this affects their personal circumstances.

Scenario 1: No change to tax band (single property landlord)

20% tax payer PAYE Income: £15,000 40% tax payer PAYE Income: £50,000
Current position (16/17) Current position (16/17)
Rental Income£10,000Rental Income£10,000
Mortgage Interest£4,000Mortgage Interest£4,000
Other Allowable Costs£2,000Other Allowable Costs£2,000
Taxable Income£4,000Taxable Income£4,000
Tax @ 20% due on Rental Income£800Tax @ 40% due on Rental Income£1,600
BTL Profit£3,200BTL Profit£2,400
Future position (20/21)Future position (20/21)
Rental Income£10,000Rental Income£10,000
Allowable Costs£2,000Allowable Costs£2,000
Taxable Income£8,000Taxable Income£8,000
Tax @ 20%£1,600Tax @ 40%£3,200
Mortgage interest relief (20% of mortgage interest of £4,000)£800Mortgage interest relief (20% of mortgage interest of £4,000)£800
Tax due on Rental Income£800Tax due on Rental Income£2,400
BTL Profit£3,200BTL Profit£1,600

Scenario 2: Portfolio landlord

Scenario 3: Rental cover

20% moving to 40% tax payer Portfolio size: 6
PAYE Income: £15,000
40% tax payer; high mortgage costs Higher interest rate
Current position (16/17) Current position (16/17)
Rental Income£60,000Rental Income£10,000
Mortgage Interest£24,000Mortgage Interest£5,500
Allowable Costs£12,000Allowable Costs£2,000
Taxable Income£24,000Taxable Income£2,500
Tax @ 20% due on Rental Income£4,800Tax @ 40% due on Rental Income£1,000
BTL Profit£19,200BTL Profit£1,500
Future position (20/21)Future position (20/21)
Rental Income£60,000Rental Income£10,000
Allowable Costs£12,000Allowable Costs£2,000
Taxable Income£48,000Taxable Income£8,000
Gross Tax @ 20% & 40% due£13,600Gross Tax @ 40% due£3,200
Mortgage interest
relief (20% of mortgage interest of £24,000)
£4,800Mortgage interest
relief (20% of mortgage interest of £5,500)
£1,100
Tax due on Rental Income£8,800Tax due on Rental Income£2,100
BTL Profit£15,200BTL Profit£400