Landlord Tax Relief: The Lowdown

New rules surrounding tax relief for buy-to-let landlords are set to benefit basic rate taxpayers.

Under the old rules, mortgage interest was deducted from a landlord’s rental income before calculating the tax.

Landlord Tax Relief The Low-down© LuFeTa / Shutterstock

Now, new legislation introduces a blanket 20% tax credit on mortgage interest payments for owners of buy-to-let properties.

The latest rules mean every landlord is required to pay tax across their complete buy-to-let income, rather than having the mortgage interest deducted first.

The government has made multiple updates to the UK property market since 2020 to recognise the evolving market but while these latest landlord tax changes are likely to benefit those on the basic rate of income tax, landlords in higher tax brackets may not be so lucky.

This change will have a significant impact on how landlords must strategise for the future and manage their finances.


Understanding tax relief changes

The new 20% tax credit on buy-to-let mortgage interest is aimed at being a simpler system for landlords. It may even be a lifeline for those in the lowest tax bracket, who could find themselves better off.

For example, if you pay £10,000 in mortgage interest, you can claim a tax credit of £2,000. This may work out to be a higher rate of tax relief than before.

However, for landlords on higher tax rates who were able to claim different relief rates of up to 40% or even 45% before, this latest change isn’t such good news.


Impact on landlords

While the new flat rate of tax relief will certainly simplify the previously complex system, critics say it could potentially push some landlords into a higher tax bracket.

Calculating their income before tax with the inclusion of mortgage interest means that on paper, they will appear to be earning more than before from their buy-to-let portfolio.

According to a survey by Simply Business, 35% of landlords say tax increases are among their greatest challenges. Navigating the new system will require careful financial planning and new strategies to make the most out of tax relief, particularly for landlords in the higher tax brackets.


What are landlords’ current income tax rates?

Landlords will need to work out their future strategy based on the new system following the changes, so what are the tax bands and individual income tax rates for 2024-25?

The current individual threshold for earnings before you start paying tax has been set at £12,570, which the government has frozen until 2028. This means landlords will pay 20% tax on income from their buy-to-let properties which earn them between £12,571 and £50,270.

The higher tax rate for buy-to-let income is £50,271, so if you earn any profits over this threshold, you will start paying 40% tax. Landlords in the additional (highest) rate tax bracket who earn £125,001 or more from their buy-to-let homes will pay 45% income tax.

For landlords on the brink of being in the higher tax brackets, the latest tax relief rules could have a negative effect. Their income tax rate could double from 20% to 40% if the inclusion of mortgage interest in their income calculation for tax purposes bumps them up into the middle group.


Can you still claim tax relief on furniture?

For many years, landlords who rented out fully furnished properties claimed a “wear and tear” element for their tenants’ furniture and furnishings such as carpets, cookers, televisions, beds and other items. This element of tax relief permitted landlords to claim up to 10% of their properties’ net annual rent – the income minus expenses.

The government now permits landlords to claim tax relief on replacing any “domestic item”. This rule applies only to any furniture that you’re replacing. You won’t receive tax relief on the cost of furnishing a new property for the first time.

The rule will apply when purchasing furniture for landlords to replace worn-out, old items that can no longer be used in your rental properties.

The latest landlord tax changes are part of a complex raft that has been ongoing for the past few years. It could be beneficial to sit down with an accountant to work out a strategy to make the most of your rental income in future.

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