Buy to let investing even riskier

The risks of buy to let investing are already well known and include the risk that the rents will not be paid, delays in finding tenants, house prices falling, the costs of repairs, borrowing money to buy a property (where finance has been taken out to purchase the property).

The restriction of finance costs for individual landlords announced in the Summer Budget has made the risk that individual landlords may not earn a profit on their investment even greater. Details of the changes are contained below.

Restriction of finance cost for individual landlords

The relief for finance costs (such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans) incurred by individuals who receive rental income on residential property in the UK or elsewhere will be restricted to the basic rate of income tax. The restriction will gradually be phased in from 6 April 2017.

Landlords will no longer be able to deduct all their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs. The relief will be phased as follows:

  • In 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
  • In 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • In 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
  • From 2020-21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

Individuals will be able to claim a basic rate tax reduction from their income tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of:

  • The finance costs not deducted from income tax in the tax year (25% for 2017-18, 50% for 2018-19, 75% for 2019-20 and 100% thereafter)
  • The profits of the property business in the tax year
  • The total income (excluding savings income and dividend income) that exceeds the personal allowance and blind persons allowance in the tax year.
  • Any excess finance costs can be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.

These measures do not apply to furnished holiday letting.

Legislation will be published in the Summer Finance Bill 2015 to implement these measures.

Chancellor George Osborne said the move was required to “level the playing field for homeowners and investors”. However, buy to let investors are already subject to both capital gains tax and tax on rental incomes whereas homeowners are not.

The unintended consequences of the move could result in landlords passing on their costs by increasing rents which could make it more difficult for prospective house buyers to save for their first deposit, or they may delay property maintenance and repairs at the expenses of tenants.

Whilst it is unclear at this stage how the new rules will actually apply, the following example, shows how the rules could apply once fully implemented in 2020/21.


The example assumes that the higher rate band starts at £55,000 and that the personal allowance is £14,000 in 2020/21.

Mr Paul Jones earns a salary of £49,000. He also owns a property which provides him with rent of £9000. The mortgage interest costs are £3600. The other allowable costs are £1000.

The taxable rental profit if mortgage interest costs are not deductible is £8000 (£9000 - £1000). The taxable rental profit if mortgage interest is fully deductible is £4400 (£9000 - £4600). Even though the net amount Mr Jones receives in rental profit of £4400 when added to his salary will keep him within the basic rate tax band, he will still have additional tax to pay under the new rules when the basic rate tax reduction is applied as shown below.

Current Rules

Salary £49,000

Taxable Rental profit £4400

Total £53,400


Tax at 0% £14,000 = £0 Tax Payable

Tax at 20% £39400 = £7880 Tax Payable


Total tax payable of £7880


New Rules in 2020/21

Salary £49,000

Taxable Rental profit £8000

Total £57,000


Tax at 0% £14,000 = £0 Tax Payable

Tax at 20% £41000 = £8200 Tax Payable

Tax at 40% £2000 = £800 Tax Payable

Less tax relief on interest at 20% = £720 (£3600 * 20%)


Total tax payable £8280


The difference in the tax payable under the current and new rules will be greater where the individual landlord has a number of properties, there is a rise in interest rates or they are already a higher or additional rate tax payer. In such circumstances, they will need to decide whether to sell the investment and invest the money in an alternative investment, do nothing and pay the additional tax or transfer the property into a limited company. However, the capital gains tax implications will need to be considered if the property is to be sold. In addition, the stamp duty land tax and availability of mortgages will also need to be considered in respect of transferring the property into a limited company.

The changes again provide an advice opportunity to review the portfolios of your existing buy-to let landlord clients.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual International cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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