Real estate: Buy-to let property

The phased restriction on income tax relief for finance costs from April 2017 means landlords of residential property need to take action.

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Cherry Reynard
Published: 06 Aug 2018 Updated: 13 Jun 2022

The phased restriction on income tax relief for finance costs from April 2017 means landlords of residential property need to take action.

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The rules

Prior to April 2017, residential landlords were able to claim the full cost of financing buy-to-let property as an expense against rental income.

Higher and additional rate tax relief for those finance costs is now being phased out, effectively restricting tax relief to the basic rate of tax from 1 April 2020.

The restriction completely removes any finance costs from the tax calculation and introduces a basic rate tax credit, equal to 20% of the related finance costs. To complicate matters further, this tax credit is restricted where the property profits are less than the finance costs, ensuring that the finance tax credit is not given against tax on other sources of income.

The impact

Once fully in force, the effect of the changes can be severe for highly-geared portfolios. In most cases, if mortgage interest payments are more than approximately three quarters of the rent after deducting other costs, a landlord paying income tax at 40% will find their tax bill wipes out any profit on the rent.

The change is one of a number in recent years designed to cool the prime residential property market and there has already been a significant drop in new investment into the private rented sector using a mortgage.

The increase in tax costs is already reducing overall returns for landlords and the government expects to collect an additional £665 million in tax from this provision in 2020/21 fiscal year.

What are we doing with our clients?

We are helping our clients quantify the effect of the changes on their buy-to-let portfolios now and in the future.

Once the impact is understood, we are working with our clients to determine the best course of action for them. Some may accept the additional tax cost and look to reduce other costs to maintain profitability; others may consider restructuring borrowing or ownership. At Smith & Williamson, we are able to advise on the tax implications of both options.

Since these restrictions on the deduction of interest costs do not apply to companies, many of our clients are considering incorporation. We are able to advise on the incorporation itself and can offer a full range of services to the corporate vehicle.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.