Everything you need to know about buy-to-let tax changes

Posted 5 April 2017

Some major changes are now in place relating to tax on buy-to-let property, and here, WhatHouse? takes you through all you need to know...

In the spring of 2015, as part of a programme of measures designed to tackle the UK's housing crisis, the government announced a number of changes to buy-to-let mortgages.

In an attempt to try and stem the number of buy-to-let mortgages, hopefully allowing more properties to be bought for owner-occupation, a range of financial measures were proposed. Now that the measures have come into effect, what do they mean for landlords?

The changes that have been made

As part of a package of measures there have been four main changes:

  • A 3% increase in stamp duty on buy-to-let properties
  • A reduction in mortgage interest tax relief
  • A reduction in Capital Gains Tax for all assets except property
  • Reform of the 'wear and tear' allowance

While some changes were implemented in 2016, changes to mortgage tax relief came into effect on 1 April.

Changes to tax relief on buy-to-lets

Previously, landlords were able to deduct the interest costs of their mortgage from any rental income earned from a property.

For example, if you receive £12,000 in rent and you paid £8,000 in mortgage interest, you would previously been able to claim the full £8,000 as a deduction. Tax would have been due on your 'profit' of £4,000.

However, from 1 April , buy-to-let investors will begin to lose this tax benefit as you can no longer offset the full cost of your mortgage. Over the next four years, the amount of mortgage interest that you can claim will reduce, from 75% in 2017/18, to 50% in 2018/19 and 25% in 2019/20. Interest relief will be phased out entirely in 2020.

Using the example above, in 2017/18 you could only claim 75% of the interest you pay (£6,000). Tax would be due on your 'profit' of £6,000.

Stamp duty changes

From 1 April 2016, any buy-to-let property purchase over £40,000 has been subject to an additional 3% stamp duty charge.

For example, before April 2016, the purchase of a £200,000 property would have incurred stamp duty of:

£0 - £125,000 0%= £0
£125,001 - £200,0002%= £1,500
= £1,500

After 1 April 2016, the stamp duty payable on the same £200,000 purchase would be:

£0 - £125,000 3%= £3,750
£125,001 - £200,0005%= £3,750
= £7,500

Landlords are therefore facing significantly increased charges when buying investment properties. In this example, buying a £200,000 buy-to-let property would result in a tax bill that is £6,000 higher.

Number of buy-to-let mortgages has decreased since changes

Since the new rules were announced, and stamp duty changes came into effect, the volume of buy-to-let mortgages has decreased sharply.

The Council of Mortgage Lenders reports that buy-to-let lending in January 2017 was at an eight-month low while the number of people taking out mortgages on investment properties also fell in January, to 5,900, down from 9,700 recorded in January 2016.

28 November 2017
How do you use the equity in your current property to buy a second one? We tell you everything here...Read more
Mortgage lending remains stable
26 April 2017
Experts believe that both the housing and mortgage markets are set for a period of stability, as uncertainty about the economic outlook post-Brex...Read more
8 March 2017
Experts from across the property industry express their disappointment at a Budget which didn't even mention housing or the building of much-need...Read more

Click here to see your activities