The start of the new 2018-19 tax year on April 6 saw further reductions in the amount of tax relief landlords can claim on mortgage interest payments.
Prior to April 2017, landlords could claim tax relief on their mortgage interest payments at their marginal tax rate. This meant basic, higher, and additional rate taxpayers could benefit from relief at 20%, 40% or 45% respectively.
However, under changes announced in the 2015 Budget, this deduction from income was restricted to 75% of finance costs from April 6 last year, with the remaining 25% as a basic rate tax reduction.
From April 6 this year, it dropped to 50%, with landlords receiving a 20% tax credit on the remaining 50% of their payments.
In the 2019-20 tax year, it will only be possible for landlords to reclaim tax relief on 25% of mortgage interest payments, and from 2020-21 onwards, landlords will only be able to reclaim tax relief at the basic rate, whatever rate of tax they pay.
Find out more about tax and buy-to-let property here.
Keeping costs to a minimum
Changes to tax relief are not the only challenge that buy-to-let landlords face. They must also pay a 3% stamp duty surcharge, introduced in April 2016, whenever they add to their portfolios.
Remortgaging to reduce buy-to-let mortgage costs can help keep outgoings down, so check your current buy-to-let mortgage rates and see if you might be able to make savings by switching to a better deal.
Some landlords decide to hold their properties in a limited company which can help counter changes to tax relief. A company can still set its costs against income and is subject to corporation tax rules.
However, setting up as a limited company won’t be suitable for everyone, so it’s vital to seek professional tax advice if you’re considering this.
For example, costs can be high to transfer existing properties to a limited company, as the limited company would have to buy your properties. That could result in a stamp duty bill, and you could also face a potentially steep capital gains tax (CGT) bill, depending on the market value of the properties at the time.
Further cuts to mortgage tax relief for landlords