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Rental Income Taxation: A Landlord Impact Analysis

14 January 2021 8572 Views
Rental Income Taxation: A Landlord Impact Analysis

The changes to Mortgage Interest Tax Relief and impact on your wallet

Before April 2017 landlords with a mortgage on their buy-to-let (BTL) properties were able to deduct their mortgage interest from their rental income before calculating tax. In April 2020 deducting your mortgage expenses from the income you make from rent to reduce your overall tax bill was removed and replaced with a tax-credit to the basic rate of income tax (currently 20%). This tax-credit or ‘tax relief’ is given as a reduction in tax debt as opposed to a reduction in tax earned from rental income. Ex-chancellor George Osborne announced the change as part of the summer 2015 budget “to make the tax system fairer”, and began phasing out the mortgage tax relief year by year from April 2017. This came as little shock with the government deliberating such changes since 1999, back when Gordon Brown was chancellor.

*Credit: Which?


Is this avoidable for landlords in a higher tax bracket?

This only affects private landlords. If you own a property via limited company, you can declare rental income after deducting the mortgage (do bear in mind the extra costs incurred with running a business e.g. corporation tax, accountant fees). Alternatively, you could potentially transfer your property ownership to your legal partner if they’re in a lower tax bracket to pay less. Profit split is determined by the level of ownership, typically 50:50, so if one owner was a higher rate taxpayer and the other one fell into the base rate bracket, 50% of each profit would be taxed differently. If you wished to split profits to a different proportion you'd first need approval from the HMRC.


Pros & Cons

Private Landlords

Limited Companies

Can leverage spousal benefits

Limited companies can offset their mortgage interest costs directly against their income

More choices of mortgages and lenders for BTL properties

Typically pay 0.5% to 1.5% higher interest rate than a typical BTL mortgage

Don’t pay corporation tax (currently 19%)

Quick and easy to set up a limited company - most lenders allow newly  established companies a BTL mortgage

Transferring property from an individual to a company incurs Capital Gains Tax & Stamp Duty Land Tax

Profit can be left in the company and can be used to buy additional investments without attracting income tax


With the abolition of mortgage interest tax relief and increased strain on high rate taxpayers, it is crucial to minimise void periods between tenancies where a landlord isn’t generating any rent but is still suffering heavy costs of mortgage repayments. It’s useful to find innovative ways to keep costs down in these all-important periods, such as ditching overpriced property listing websites. With the team at Ministry of Rooms you can make unlimited free listings and revisions for landlords looking to advertise their rooms.

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