The changes to tax relief on mortgage finance payments was announced in the 2015 budget by George Osborne. They started to come into effect in April last year and already some residential landlords are feeling the pinch. The new rules effect both UK resident and non resident landlords who live outside of Britain.
What has changed?
Landlords of residential properties used to be able to deduct 100% of their mortgage interest payments, alongside other expenses, from their income before paying tax on the rest. Many buy-to-let mortgages are interest only, which meant that the entire sum of your mortgage could be deducted, resulting in an incentivising tax saving. As of April 2017, this will no longer be the case.
The percentage of deductible finance payments will be gradually reduced to 0% over the next four tax years. This will be replaced by a 20% tax credit for your mortgage interest, which is being introduced proportionately, to correspond with the previous finance payment reductions.
How is the four year reduction of mortgage finance tax relief going to work?
This is best explained in a simple list, incorporating the deduction in mortgage finance tax relief and the percentage of mortgage interest that qualifies for replacement 20% tax credit for, each tax year.
- Up to 2016-17 tax year – 100% mortgage tax relief, mortgage finance tax credit didn’t exist
- 2017-18 tax year – 75% mortgage tax relief, 25% claimable for 20% mortgage finance tax credit
- 2018-19 tax year – 50% mortgage tax relief, 50% claimable for 20% mortgage finance tax credit
- 2019-20 tax year – 25% mortgage tax relief, 75% claimable for 20% mortgage finance tax credit
- From 2019-20 tax year – 0% mortgage tax relief, 100% claimable for 20% mortgage finance tax credit
The new tax credit means that you can cut your final tax bill by 20% of your mortgage interest.
Will this mean I pay more tax?
The answer is yes the changes to how you can claim mortgage finance tax relief will usually result in landlords paying more tax. If you are a higher rate taxpayer, you will pay more because you can no longer apply the highest rate of tax that you pay (40%) and only get tax relief at the basic rate of 20%.
Why have the government introduced a policy that negatively impacts residential landlords’ profit margins?
The government has decided to cut this tax relief for residential landlords as part of their strategy to “make the tax system fairer”. It is seen as a way to even out the playing field between buy-to-let landlords and those buying property to live in.
Does it affect everyone who owns residential property?
The new rules apply to individuals and partnerships that own rental property as both UK and non UK residents. It does not apply to incorporated companies or landlords of Furnished Holiday Lettings.
Is the mortgage tax relief change a good idea?
There is a real division of opinion here. Some think that it will lead to increased rents and less homes in the rental market because landlords simply sell up when their business becomes unprofitable. Others think that this hasn’t gone far enough and more should be done to increase access to home ownership to those buying their own properties to live in.
Some feel that the changes are a huge blow to the property rental industry, leading to big losses for landlords and, almost inevitably, a hike in rents to make up the shortfall. It discourages new landlords from entering the sector and therefore may add to the lack in property to rent.
Residential landlords association
The Residential Landlords Association (RLA) produce a quarterly survey of the industry and their recent report have some alarming findings for both landlords and anyone who seeks to rent their home. It states, “landlord sentiment to the sector and investments is deteriorating. We estimate on top of the 46,000 privately rented homes that have already been lost (MHCLG, 2018, there will be a further net loss of 133,000 homes to rent. The causes of this sell-off by small-scale private landlords is clear. The government tax changes are making it unviable to operate in the sector. In our previous research, we found that 62% of landlords reported their profitability would be reduced by at least 20% and 67% reported they would minimize investment due to the government tax changes (Simcock, 2018). “43% of landlords reported they had increased rents in the past 12 months, with 31% of these landlords reporting it was due to the changes in Mortgage Interest Relief.”
This is supported by the Financial Times article by Cat Rutter Pooley on 12th July 2018,
“Buy-to-let landlords have suffered from a package of tax and regulatory changes that have shrunk profit margins and discouraged new investment in the sector. A three percentage point stamp duty surcharge on buy-to-let and second homes introduced in April 2016 and cuts to the tax relief on mortgage interest phased in from April 2017 have damped the once-booming sector.”
The report also points out that the change in the tax relief regulations will have no impact on cash-rich property investors, but penalises “middle-income earners that may look to purchase a property with finance”.
Others are of the opinion that these current reforms don’t go far enough.
In a report called ‘Green, pleasant and affordable’, two previous advisors to the Prime Minister propose removing the remaining mortgage interest tax relief and also “look at the generosity” of the recently revised Wear and Tear allowance. Written by Neil O’Brien and edited by Will Tanner, this report takes a very firm stance on the impact of landlords’ tax relief on Britain’s growing housing crisis.
As reported in Contractor UK, Mr Tanner said: “We should rebalance the housing market away from owning for a return and towards owning for a home. It is a sobering thought that if Britain had maintained the balance between privately-rented and owner-occupied properties since 2000, we would have two million more families owning their own home.”
Mr O’Brien, MP for Harborough, looked at the same figure from a slightly different perspective, saying the situation has “locked 2.2 million families out of home ownership.”
The report notes that landlord tax relief reforms have been proven to have a “positive impact on homeownership”, based on 2015-16 evidence. But that “measures taken so far are not large enough to produce a step change in ownership.” It concludes that further cuts to landlord tax reliefs are an important part of a wider plan to rectify the balance between rented and owned property.
Landlord tax return questions answered
Get further the details about the change in mortgage finance tax relief in our landlords tax return FAQ section. We help you work out the best course of action to keep your property business as tax efficient as possible – whether you are resident on non-UK resident. Incorporation may seem like the best option to avoid tax relief losses, but all the other elements need to be considered before you finalise your decision. We’ll talk it all through with you and take you through whichever process is best for your business.
