As you are a buy-to-let investor, you’d be forgiven for feeling rather despondent following the Chancellor’s recent crackdown. A stamp duty hike for buy-to-let purchases has already arrived – with a corresponding spike in sales beforehand – and mortgage interest relief for tax on rental income will start to be hacked back next April. Add to that the additional capital gains tax for our expatriate clients and well need we go on.


Let’s take a look at the questions investors need to be asking themselves before taking a decision about the future direction of their property portfolios. Amid the policy changes that are being introduced, the two that will have the biggest financial impact are the extra 3 per cent stamp duty due on buy-to-let property purchases and the reduction in tax relief available to landlords.

Stamp duty

Extra money that goes on stamp duty is cash that can’t go towards the purchase – so the new surcharge does represent a barrier to entry and Landlords certainly appeared eager to avoid being hit by the extra charge. A stampede to get deals done before the deadline meant buy-to-let purchase mortgages were up an astonishing 226 per cent, from 8,800 in March 2015 to 28,700 in March 2016, according to Council of Mortgage Lenders figures. Following the late November 2015 announcement of the stamp duty hike, there were 48,800 buy-to-let mortgage purchases worth £7.2 billion between January and March 2016, compared to £26,800 worth £3.3 billion a year earlier. Arguably, this has pulled forward a significant amount of purchases from the remainder of 2016.

Income tax

What about the reduction in the mortgage interest tax relief that landlords can claim? The Chancellor has capped this at 20 per cent, meaning it will hit those landlords who pay a higher rate of tax. For our clients who endeavor to remain under the personal allowance, there is no impact and up to £32,000 in UK income will continue to be taxed at 20%. When UK income inclusive of net rent etc. exceeds this level is the point that reducing relief needs to be accounted for.

Previously all mortgage interest could be offset against rental income, with landlords only paying income tax at their marginal rate on the profit in-between. From April 2017, the tax position will start to shift towards one where mortgage interest relief is capped at the equivalent of basic rate tax from 2020 – currently 20 per cent.

The total mortgage interest relief that can be claimed will be whittled away until it is removed altogether and replaced with a 20 per cent tax credit against mortgage interest.

Importantly the new rules also change how income is calculated for tax purposes. Until April 2017, tax is payable on your net rental income after deducting allowable expenses, including mortgage interest (which for most people is the major deduction).

After April 2017, income will be before the deduction of any mortgage interest and this is added to your other income to decide your tax rate, something that could push basic rate taxpayers into the higher rate band.

For those who decide to act rather than pay the extra tax, there are two main options, these are:

  • to sell the property and invest their money elsewhere,
  • or to set up their buy-to-let within a corporate structure, in which mortgage interest could still be offset against tax.

Landlords who do decide to sell need to be aware of further tax implications. For example, although capital gains tax has been reduced to 20 per cent on other investments, it remains at 28 per cent for sizeable gains made from property. Capital gains tax is charged at 18 per cent for basic rate taxpayers and 28 per cent for higher and additional rate taxpayers for gains on property. However, for expatriates the gain is only calculated from April 2015. There is an annual capital gains exception of £11,100, but any profit over this amount is subject to tax.

Landlords who decide to set up a limited company must be aware that there are added complications. Mortgages can be harder to get and more expensive and you must follow the rules on running a company and filing accounts and returns. While you can pay corporation tax of 20 per cent on rental profits, if you try to withdraw any of this from the company extra tax either on income or dividends will be incurred. However, dividends have been granted relief from April 2016, with the first £5000 per annum being tax free.( see our blog on alternatives to direct ownership)

There is also an issue that when owners transfer their property from individual to company ownership there can be a stamp duty or capital gains tax event and therefore individual advice must be taken… as always.

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