Daily Mail

Don’t get floored by a buy-to-let profit slump: How to protect your investment as tax hikes start to bite

  • Landlords are being urged to seek out cheaper mortgage deals quickly
  • The way tax is calculated on buy-to-let income is changing in April 

Landlords are being urged to seek cheaper mortgage deals fast to keep costs low as new tax rules are set to bite into their profits.

In April the way tax is calculated on rental income from buy-to-let investments is changing.

Investors will no longer be able to deduct mortgage interest costs from rental income when calculating the taxable profit.

Instead, they will be taxed on their rental income while receiving tax relief on mortgage interest payments.

This relief will be reduced in stages to 20 per cent by 2020. So currently, someone receiving £10,000 of annual rental income and paying mortgage interest costs of £8,000 will be taxed on profits of £2,000.

The actual sum will depend on whether they are a basic, higher or additional rate taxpayer. But for a higher rate – 40 per cent – taxpayer, the bill will be £800.

But under the new tax regime, by 2020 this landlord will be taxed on the £10,000 of income (£4,000) while receiving 20 per cent relief on £8,000 of mortgage interest (£1,600) making their overall tax bill £2,400, three times what it is now.

Though the changes are being phased in over four years they will mean bigger tax bills – and smaller profits – for many landlords. Some investors will also be pushed into a higher tax bracket as a result.

The changes are part of wider moves by the Government, which unveiled its White Paper on housing earlier this month, to take the heat out of the housing market and help first-time buyers on to the ladder.

It comes on top of higher stamp duty on second homes, introduced in April last year for England, Wales and Northern Ireland. Also, the regulator has insisted on stricter lending criteria.

Home loans expert David Hollingworth, of London and Country Mortgages in Bath says landlords feel they are under attack from all sides – more tax and tighter lending requirements in terms of rent as a proportion of mortgage costs.

He says: ‘These measures all add up. It has never been more important for landlords to keep their costs under close review.

We are seeing more buy-to-let investors looking to take advantage of the low mortgage rates on offer.’


Not only will tax increases eat into landlords’ profits, but any future rise in mortgage rates could further erode returns.

Thankfully, mortgage rates are lower than a year ago and there is plenty of choice.

According to financial product scrutineer Moneyfacts, the average five-year, fixed-rate, buy-to-let deal has fallen from 4.09 per cent to 3.77 per cent in the past 12 months.

Currently, Leeds Building Society has a five-year fix at 2.45 per cent, also with a £1,999 fee for those with 40 per cent equity.

Virgin Money has a five-year fix at 2.48 per cent, with a £1,995 fee, again for those with 40 per cent equity.

Ray Boulger, at mortgage broker John Charcol in Central London, says more buy-to-let borrowers are taking five-year fixed rates for payment security.

He says: ‘Even if you have a redemption penalty on your loan, it may be worth paying it to find a lower cost mortgage.’

Read More Here at the Mail Online.

Malcolm Davidson Mortgage Broker. 
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