What is buy-to-let mortgage interest tax relief? And how does it affect me?

Interest tax relief rules have changed. Some landlords face higher bills. This article explains what the changes could mean for you.

What is buy-to-let mortgage interest tax relief?

The way landlords must declare their rental income has changed. This means higher tax bills for many. 

Whilst borrowing money through a buy-to-let was mortgage once a major tax advantage, this is no longer the case. This article explains what key changes have taken place and the impact on how much tax landlords must pay.

Landlord mortgage interest tax relief in 2022-23

From April 2020, it is no longer possible to deduct any of your mortgage expenses from your rental income to reduce your tax bill.

Instead, you now receive a tax credit, based on 20% of your mortgage interest payments.

For higher-rate taxpayers, this is less generous than the previous system, which effectively enjoyed a 40% tax relief on mortgage payments.

The new system has been phased in gradually since 2017.

Why the tax credit is bad news for landlords

This new system means higher-rate taxpayers can no longer claim the tax back on their mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the higher rate of tax paid.

Additionally, these new rules could force some landlords into a higher tax bracket, because they’ll need to declare the income that was used to pay the mortgage on their tax return.

An example of a buy-to-let mortgage interest tax relief

Assuming a landlord takes in £1,000 per month rental income and makes mortgage interest payments of £650 per month.

• They’ll pay tax on the full £12,000 rental income they earn
• They’ll pay £7,800 in mortgage interest
• They’ll get a tax credit of £1,560 (£7,800 x 20%)
• A basic-rate taxpayer will pay £840 – no increase compared to the old rules
• A higher-rate taxpayer will pay £3,240 – double the amount payable under the old system.

Can landlords incorporate to keep their mortgage interest relief?

Yes. The change in mortgage tax relief only affects private landlords – i.e. individuals not companies.

Therefore, by incorporating a business that owns their rental properties, landlords will be able to continue to declare rental income after deducting the mortgage.

However, if you’re considering doing this is vital to research it thoroughly, as even with this tax saving you could end up out of pocket.

Higher mortgage rate

One reason for this is mortgage rates for businesses are more expensive than for private landlords. Consequently, this could cost you more than you’d save in higher tax relief.

Another reason is you would need to pay stamp duty again when you transfer ownership of the property to your business.  You can check to see how much this will cost you from the enclosed stamp duty calculator.

Lastly, if you decide to incorporate, your taxes will become more complicated. You will now need to file taxes for your company, and pay corporation tax on your profits.

To get the rental income, you’ll need to pay yourself a dividend which will be taxed as income. Though this will be at a lower rate than receiving income directly.

Suggested further reading

To find out in greater detail whether you should buy through a company, we suggest reading Advantages Of Buying Property Through A Limited Company

There are some Common Questions About Purchasing Property Through A Limited Company You can also find out more on Tax Rates and Useful Tax Links 2022/23 or you could download our tax card which is located under guides.

There is an additional stamp duty surcharge if you are an overseas investor. Overseas investors are still keen on the UK property market as the returns on offer in UK hotspots are great. There is currently a Housing Stampede in the Northwest with cities such as Manchester and Liverpool leading the way. We suggest speaking to your advisor at Esper Wealth, who can help explain the latest rule changes for interest tax relief.