The game has changed for many buy-to-let landlords. The change to buy-to-let tax relief has been phased in, which could translate into a big loss of profits for many with rental properties. What can you do about it? Article by Nick Green.

It used to seem as if buying to let was a licence to print money. Rising house prices delivered a double bonus: driving ever more people towards renting, while also boosting the value of your property portfolio. But the change to buy-to-let tax relief, which takes full effect from this April, may prove a real headache not just for landlords, but for their tenants too.

What does the loss of buy to let tax relief mean?

If you’re new to buy-to-let, you might not appreciate the full implications. Up to now, people buying to let have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax. This means that a basic rate taxpayer would get 20 per cent tax relief, but those at a higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent.

What’s changing in landlord tax relief?

Now that the changes are fully in place (since April 2020), tax relief is a flat rate of 20 per cent. Landlords who pay basic rate tax would see no change, but those on higher incomes will find themselves losing much more in mortgage interest payments going forward. From April 2017 to April 2020 the change was phased in gradually, to ensure that there was no sudden increase in income tax for landlords. However, the ongoing impact could still be serious for many. The HMRC website has useful case studies that show how you could be affected.

How severe could the impact be?

The Nationwide Building Society published estimated figures of how a typical landlord’s profits might be hit. Someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would plunge to £960.

Other predictions have been even gloomier. The higher the interest you pay, the more you would feel the pinch, so if you have a long-term fixed rate (which is usually higher) you may find your profits aren’t much better than the returns from a savings account. The additional stamp duty may for some be the final straw.

How to cope with the loss of buy-to-let tax relief

One solution, of couse, may be to increase rents so that the extra cost is passed on to tenants - but this solution is far from ideal. Most tenants are already paying as much as they can afford, and you risk pricing yourself out of the market. However, if you think you will be affected, there are a few other things you can try:

1. You could switch to shorter-term fixed rate deals to get lower rates of interest, although these mortgages carry more risk.
2. You could place your property portfolio in a limited company structure. You would then pay corporation tax (which is lower) rather than income tax on your profits. A drawback is that your mortgage options will narrow, as fewer providers will lend to a company.
3. If your spouse pays a lower rate of tax, you could transfer ownership of one or more properties to them (taking care this does not lift them into a higher tax band).

As with most clouds, there is a silver lining. If you’re a landlord with a lower income, you’re no longer at such a disadvantage to those in the big league. This level playing field may in fact help the new wave of ‘silver landlords’ hoping to use their pension pots to buy rental property. Also, if you’re a homebuyer, you may find prices becoming more affordable as the competition from buy-to-let decreases.

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