Since April 2017, the way landlords must declare their rental income has started to change, meaning most will see their tax bills rise significantly.

While borrowing money through a buy-to-let mortgage was once a major tax advantage, it’s no longer the case. KKVMS explains what changes are taking place, how they affect how much tax landlords must pay.

Landlord mortgage interest tax relief in 2020-21

As of April 2020, you are no longer able to deduct any of your mortgage expenses from rental income to reduce your tax bill.
Instead, you’ll receive a tax-credit, based on 20% of your mortgage interest payments.

This is less generous for higher-rate taxpayers, who effectively received 40% tax relief on mortgage payments under the old rules.

The new system is being phased in over several years. For the 2019-20 tax year, you could deduct one quarter of your rental income, while three quarters of your mortgage interest payments received the tax credit.

For previous years:
• In the 2017-18 tax year, you could claim 75% of your mortgage tax relief
• In the 2018-19 tax year, you could claim 50% of your mortgage tax relief
The table below shows how this will impact on a higher-rate taxpaying landlord receiving £950 rent a month and paying £600 towards their mortgage.

Why the tax credit is bad news for landlords

This new system will potentially increase your tax bill in two ways. If you’re a higher or additional-rate taxpayer, you won’t get all the tax back on your mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid.
Less obviously, you could also be forced into a higher tax bracket because you’ll need to declare the income that was used to pay the mortgage on your tax
return. This could push your total income into the higher (£50,000 in 2020-21; the same as in 2019-20) or additional-rate (£150,000) tax brackets, depending on
your income from other sources, such as your salary or pension.

Mortgage interest tax relief in 2020: an example

Going back to our example of a landlord that charges £950 per month rental
income, with mortgage interest payments of £600 per month.
• They’ll pay tax on the full £11,400 rental income they earn
• They’ll still pay £7,200 in mortgage interest
• They’ll get a tax credit of £1,440 (£7,200 x 20%)
• A basic-rate taxpayer will pay £840 – no increase
• A higher-rate taxpayer will pay £3,120 – double the tax