Changes to Tax Relief on Mortgage Interest for Landlords in 2021

Alan Aksenenko
By Alan Aksenenko
Feb 20, 2021
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Landlords have a number of strict responsibilities they need to adhere to, with one of the more important ones centring around the process of taxation. 

It can be frustrating as a landlord to be subject to changing tax rules and regulations requiring a landlord to pay increasingly higher tax rates as landlord tax relief is subject to further cuts and limitations. 

However, there are a few ways through which you as a landlord can avoid such pitfalls and maintain a positive return on your property investments. 

Landlords can no longer claim tax relief on mortgage interest from April 2020

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Over the course of the last four years, the UK government has implemented a gradual change in taxation rules for landlords. This will fully come into play as of the 2020-2021 tax year.

The new rules mean that landlords can no longer claim mortgage interest tax relief from April 2020. 

The reason for this change, according to the government, is to restrict the tax relief available to the highest-earning landlords that make the largest profits on their rental properties. 

It was projected through studies carried out by the government that this new change in taxation would leave 82% of landlords unaffected and thus in theory impact only the 18% of landlords that generate more significant revenue through their rental operations. That being said however, landlords are in fact expecting that the changes will affect 40% of them, which proves to be problematic for many.

What were the previous tax rules?

Previously, landlords could deduct their mortgage interest from their earnings in order to reduce the amount of income tax they had to pay every year. 

Now, landlords will receive a tax credit equivalent to 20% of their mortgage interest payments. If landlords are in a higher tax bracket and pay 40% tax rates, they will now receive fewer tax breaks.

Setting up a buy-to-let limited company could reduce the tax you pay

iI is projected that around half of all landlords will be setting up a buy to let limited company to avoid the cuts to landlord tax relief. 

The reason for setting up a limited company as a landlord is that you could be subject to preferential tax rates and subsequently pay less tax on your properties. Buying a property through a buy to let mortgage scheme as a company allows landlords to avoid the new reductions in landlord tax relief. 

Through the corporate mechanism, one is able to off-set the mortgage interest against the profits, subject to the corporation tax rate, which stands at 19% and is significantly lower than individual tax rates. 

Challenges in buying properties through a limited company

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As there has been a substantial increase in applications for buy to let mortgages through companies rather than individual bodies, it has become more difficult to secure a buy to let mortgage. Lending criteria and the general application process are deemed to be strict and restrictive, and time-consuming in applications for mortgages. 

That being said, it is almost certainly worth investigating setting up a limited company by registering it with the Companies House and registering for corporation tax. Make sure to consult a tax expert before taking the plunge so you have a full understanding of the tax implications. 

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