Understanding buy-to-let mortgages and tax

There are 2 key taxes that you need to be aware of as a landlord (note if you take a buy-to-let mortgage and rent a property to tenants you are legally a landlord), Stamp Duty Tax and Income tax (when offsetting mortgage interest). Both of these has changed significantly as part of government reforms designed to ease the pressure on the housing market and create more opportunities for first time buyers.

Buy-to-let and Income Tax

Buy-to-let properties were once seen as a great way to invest as they afforded the ability to claim back the interest paid on mortgage payments. This is a particularly good investment if you are paying 40 or 45% income tax through PAYE. In simple terms, your properties become an expense with mortgage payments viewed in two separate ways:

  1. Monthly Repayment Amount: This segment was viewed as an investment, in simple terms you are paying for your property with this money so it taxable.
  2. Monthly Interest Amount: This segment was viewed as a legitimate expense as you receive nothing in return for it, the funds are simply paid to the mortgage lender.

Wow, that's great news for property investors right! Well, no. The above taxation approach is being phased out by 2020 at which point you will not be able to deduct the monthly mortgage interest payments from your income tax bill. This may seem of little consequence to a first time landlord or if you are new to buy-to-let but the impact is huge, particularly for higher rate tax payers..

So, what do these changes mean for you? Rather than talk through examples, we suggest you use our Landlord Income Tax Calculator which allows you to calculate the exact impact on you throughout the tax transition and beyond, the Landlord Income Tax Calculator allows you to see what your take home pay would be after tax relief on mortgage interest payments and how the reduction increases your income tax bill via increased PAYE contributions.

Buy-to-let and Stamp Duty Tax

Stamp duty Tax is a tax applied on the purchase of all properties that exceed a specific value. Stamp duty was originally a flat rate tax but has evolved into a tiered threshold tax calculation similar to PAYE. In simple terms, the more the property is worth, the higher percentage of tax you will pay.

Rather than run through examples of Stamp Duty tax, we think it is easier to use our Stamp Duty Tax Calculator, this allows you to enter your property purchase price and see the amount of Stamp duty and how it is calculated.

Landlord Tax Summary

Over recent years there have been sustained drives by the UK Government to reduce the number of private landlords and ease the pressure on the housing market. The governments plan is to make property investment less attractive and encourage investors back into stocks and other investment opportunities. The recent changes to tax associated with buy-to-let and private landlords will sting many but property investment still provides good ROI (Return on Investment) if budgeted correctly.

It is however important to look at the trend of change. The Government has very few tools at its resource to influence the housing market, the two it has are not good news for landlords. The government can either increase tax on buy-to-let (by forcing all landlords to become limited companies and file their accounts and pay tax in line with other businesses)/introduce a new Landlord specific tax or increase interest rates via the Bank of England/make it harder for buy-to-let mortgage lenders to access funds and support from the Bank of England. However you look at it, buy-to-let remains profitable but the future is not as golden as it has been for the past 3 decades.

Previous: How much can I borrow on a buy-to-let mortgage?

Next: Pros and Cons of buy-to-let mortgages

First Time Buyers



Mortgage Budgeting

Landlord Guides and Tax Calculators