Buy-to-let tax changes | Mortgage interest relief.

  • From 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the tax due.
  • So tax will be paid on turnover rather than profit, meaning tax could be due on non-existent income.
  • For higher-rate taxpayers, mortgage costs above 75pc of rental income will make their BTL investments loss-making.
  • Mortgage interest relief will be restricted to 20pc, meaning that higher and additional-rate taxpayers will be particularly affected.

Example: Landlord pays 40pc tax

Now your BTL earns £20,000 a year and the interest-only mortgage costs £13,000. Tax is due on the profit. You pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

From 2020 tax is due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.

You pay 40pc tax on £20,000 (£8,000), less the 20pc credit (20pc of £13,000 = £2,600).

HMRC gets £5,400 and you get £1,600. Your tax bill has gone up by 93pc.

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Author: Elaine Walker