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How the proposed buy-to-let tax changes could affect you

By Andrew Ellinas LL.B.Wednesday, 23 September 2015

The surprise tax change unveiled in George Osbourne's summer Budget on 8th July will affect many buy-to-let investors. The tax increase is proposed to be phased in from 2017 and fully implemented by 2020.

All higher-rate taxpayers who own buy‑to‑let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.

At the heart of the change is a landlords’ future inability to deduct the cost of their mortgage interest from their rental income.

In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

Here is a worked example assuming you, the landlord, pay 40pc tax.


Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say the Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.

 Over 30,000 people have signed a petition at urging the government to reverse the planned tax relief restriction on ‘individual’ landlords. At 100,000 signatures, the petition will be considered for debate in Parliament.

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