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The current level of demand for letting options in the United Kingdom means that it is easy to see why so many people are looking into acting as a landlord. This can be a fantastic way to generate income and help others but it is important to know that being a landlord is difficult. There are many challenges associated with being a landlord and there is also a great level of administrative issues to consider, so if you want to be a success as a landlord, it is important that you understand these issues and know what you need to do to comply with all regulations.

There are many tax issues for landlords to bear in mind but in 2017, the biggest landlord tax issue relates to mortgage interest tax relief. There was a change as of April 2017 and the impact of this change will come fully into effect over the next four financial years. The changes can be seen as follows:

• 2017/18 – The current state of deduction from property income will change to 75% with the remaining 25% now available at the basic rate of tax reduction

• 2018/19 – For this period, the split will take the form of 50% finance costs deduction and 50% as a basic tax rate reduction

• 2019/20 – For this period, the split will take the form of a 25% finance costs deduction and 75% as a basic tax rate reduction

• 2020/21, all financing costs incurred by a landlord will be given at the basic rate of tax reduction.

These changes can have a huge impact on a landlord’s opportunity to generate income and clear a profit at the end of the year. While the Government has said that the vast majority of landlords will not be affected, and this is the case for landlords who were on the basic rate and who will still be on the basic rate after the changes have been implement, many other landlords will be severely impacted. If a landlord starts off on the basic rate of tax and finds that the change moves them into a higher bracket, they will be affected financially.

Will landlord tax impact on you?

As an example, a landlord with rental income per year of £12,000 and mortgage interest payments of £7,500 would have recorded a net profit of £4,500 per year. This would result in tax payments of:

·         Basic rate tax payer paying 20% of £4,500 = £900 tax bill per year

·         Higher rate tax payer paying 40% of £4,500 = £1,800 tax bill per year

Looking at the scenario by 2020/21, the impact on some landlords becomes apparent. The basic rate tax payer will face a tax charge of £2,400; which equates to 20% of their £12,000 rental income. For the landlord on the higher rate, their tax charge would be £4,800; equating to 40% of the £24,000.

It is important that landlords understand what impact these changes will have on them

From this figure, the landlord can remove the basic rate of tax relief from their mortgage interest. This comes out at £1,500 which is 20% of the £7,500 mortgage interest payment. This results in tax payments of

·         Basic rate tax payer paying £2,400 - £1,500 = £900 tax bill per year

·         Higher rate tax payer paying £4,800 - £1,500 = £3,300 tax bill per year

The basic rate tax payer landlord is unaffected but the landlord on the higher rate of tax will be paying a significantly higher figure. Their tax bill per year rises from £1,800 to £3,300 which is a rise of £1,500 each year.

With this sort of change, you can see why many landlords are re-examining their landlord tax and determining what is the best way forward for them in the industry. At Geoffrey Matthew, we understand these can be trying times for many professionals in the lettings market, but we are here to help. Any landlord looking to discuss their options, or just find out more about the market, should arrange an appointment with us.


Landlord Tax: Everything You Need To Know


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