1/3 of Landlords Selling Properties due to Mortgage Tax Relief Change

Mortgage tax relief changes are causing 37% of landlords to consider selling their rentals.

Keeping up with tax changes is no easy task, and landlords already have plenty on their to-do lists. The Landlord Works has recently stated that more than a quarter of landlords with larger portfolios of 20 or more buy-to-lets have already sold one or more of their properties to lessen the tax impact. And for landlords with between 2 – 5 properties, it’s said that 13% of landlords have already sold in order to minimise the tax burden.

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In the past, landlords were able to deduct mortgage expenses from their rental income to reduce their overall tax bill. 

However, HMRC began to phase out the finance costs you could deduct in 2017, introducing a new relief called “tax credit”.

How has mortgage tax relief changed over the years? 

Many changes, big and small, have taken place throughout the years. HMRC announced recently (6th January 2022) that taxpayers who requested it were given an extra month to submit their 2020/21 Self-Assessment tax returns.

According to research by the estate agent Hampton, the number of landlords who have put their buy-to-lets in a company rather than personal name has doubled over the last four years. 

There was a surge of 47,400 new buy-to-let companies in 2021, which began a spike that spread across the UK. And according to Companies House data, that’s the highest number on record.

Here are a couple key points that the government has introduced in tax changes for landlords over the years. 

  • Before 2017, you could deduct finance costs, such as mortgage interest, from your rental income 
  • However, HMRC simultaneously introduced a new relief called ‘tax credit’ – phasing out the finance costs you could deduct in 2017 over a 4 year period 
  • Tax credit, which came into full effect from April 2020, meant that landlords could no longer deduct any of their mortgage interest from their rental income when calculating their taxable profit
  • Instead, landlords now receive a 20% tax relief on mortgage interest payments – this is less generous for higher-rate taxpayers who previously received 40% tax relief on mortgage payments

A recent YouGov poll conducted on behalf of NRLA found that almost 1 in 4 private landlords have been faced with rental income loss due to the pandemic. According to This Is Money UK, 8 in 10 landlords feel the changes have unfairly punished them, with a similar number saying there should be more support for landlords due to Covid-19.

Can landlords relieve their mortgage tax burden? 

With the loss of the mortgage interest tax relief, many landlords are pondering whether they should sell more of their properties in order to help alleviate the stress of tax burdens. 

A picture of a houses

But there is another detour for landlords to take. Many investors are choosing to purchase property via limited companies rather than their own personal names. 

For example, instead of purchasing property in their own personal name, a landlord may choose to do so via limited companies, allowing them to offset all of their mortgage interest against the rental income before paying tax. This essentially means whilst individual landlords are effectively taxed on turnover, company landlords are taxed on profit.

Of course, this is entirely up to the landlord and their individual circumstances. But considering different routes is something every investor needs to consider when it comes to deciding what may suit their personal circumstances best. 

Whether you’re thinking about sprucing up your portfolio or looking to invest in buy-to-let property yourself, it’s vital to keep up with tax changes as it affects everyone who intends to purchase, own or sell buy-to-lets. If you’re looking to invest in a buy-to-let property, calculate your mortgage with our free calculator or speak with one of our advisors to find a deal that’s right for you. 

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