Taxman’s raid on buy-to-lets

As well as removing the wear and tear allowance for furnished buy-to-lets, HMRC have recently announced another change which will, for many landlords have a much more serious impact.

At the moment all of the interest (but not capital) on any loan taken out to buy, improve or maintain a buy-to-let property is fully deductible for tax purposes. Going forwards, rather than being allowed to deduct the full amount of loan interest, investors will get relief only at the basic rate of tax. The new regime starts to be phased in from April 2017, and will be fully in place by 2020.

This change is only for Income Tax purposes, so doesn’t affect companies, (at the moment – watch this space). It will also only impact higher-rate tax payers.

To get an idea of the impact of the change on a typical buy-to-let investor, consider the example below:

Rental income from a buy-to let portfolio is £45,000 per annum

Interest on loans is £20,000 per annum

Other expenses are £5,000 per annum

Our investor has other income which means that he/she is a higher rate taxpayer.

Before the change our investor will be paying income tax of £8,000 on annual profits of £20,000

After the change our investor will be paying income tax of £12,000 on the same profits – an effective tax rate of 60%.

There may be a number of strategies which investors can follow to reduce the impact of this unwelcome change.
• Repay mortgages and loans – possibly by selling assets or by refinancing loans onto assets where tax relief is available.

• Sell properties, and assuming that you want to continue to invest in the property sector:

  • Invest in commercial property (where the new interest rules do not apply);
  • Invest via a company;
  • Invest jointly with others in debt-free residential property;


  • Invest in a managed residential property fund

• Sell the whole or part of your interest in any buy-to-let property to a company which you control, on terms that the company takes on the whole of the borrowing.

None of these options is ideal and each has other cost or tax implications which would need careful consideration