Residential landlords make up a large portion of our clients here at Thomas Barrie, and the impact of changes to mortgage interest relief made by those in UK Government is not lost on us.

For years, our buy-to-let clients were able to offset their entire mortgage interest against their profits. But this changed when Westminster opted to phase out this benefit from April 2017.

What this means for most of you is that instead of paying tax on your profits, you will have to pay tax on your rental income instead. The changes do not affect basic-rate taxpayers.

For the rest of 2018/19, you are able to offset 50% of your mortgage interest against your profits, and this will reduce to 25% from 6 April 2019.

The facility to offset your mortgage interest against even a portion of your profits will be removed completely from 2020/21.

Sure, this will be replaced by a new 20% tax credit for all rental borrowers, but this will be a drop in the ocean compared to the reduced liability provided by mortgage interest relief.

This has led some buy-to-let landlords around the UK to consider taking drastic measures, and you should be aware of the risks if you are thinking of following suit.


Higher income tax bands

Depending on how much you earn and which of the five income tax bands you fall into, changing your property portfolio or increasing rents could be a bad idea.

While it looks like a logical move in principle, it also has the potential to nudge you into a higher income tax band.

For example, let’s imagine Charlie. He earns £38,000 a year as an employee and is an intermediate-rate taxpayer. He has a buy-to-let property in Hillhead which was rented out for £11,400 in 2017/18.

He paid £3,240 in mortgage interest last year, but can only deduct 75% (£2,430) of this from his profits this year.

The revised £8,970 of his buy-to-let profits pushes her into the higher-rate band and makes him liable to pay 41% in income tax.


Limited companies and capital gains

Selling a buy-to-let property could land you with a capital gains liability of 28% if your profit is more than the tax-free exemption of £11,700 in 2018/19.

One alternative would be to rent out your property through a limited company, where loan interest remains a deductible expense against rental income.

Depending on how many buy-to-let properties you own, it may make sense to sell those and buy two or three properties through a limited company.

This would negate to the tax changes to mortgage interest relief but beware – it would probably also leave you facing a large capital gains tax bill.


Get in touch 

For more information on how these changes affect you, or to discuss your alternatives, speak to one of our experts by calling 0141 221 257 or email us at