The Challenges Facing the Buy-To-Let Investor

Whether our client’s source of wealth stems from the sale of their family business or a fine piece of artwork, a common investment for many HNW individuals is residential property.  After all, we all live in a house - its ‘real’ – and we like what we know and think we understand.

Strong growth once seen in the Buy-To-Let (BTL) market has begun to tail off in the last two years, as the impact from a gradual withdrawal of mortgage interest tax relief, stamp duty land tax (SDLT) reform and stricter mortgage underwriting rules begins to shine through.

“TAX DOESN’T HAVE TO BE TAXING”…THEY SAID.

Before April 2017, BTL landlords were able to deduct the full cost of mortgage interest payments from their rental income, reducing their tax bill.  From April 2017 and until April 2020, transitional rules allow for a gradual phase down of deductible mortgage interest from rental income before tax is applied.  Private landlords will then only benefit from a 20% tax deduction for mortgage interest relief, unable to deduct mortgage interest costs against profits.

As a consequence of this change, many BTL landlords paying higher rate income tax will see the profitability of their investment fall. As shown in the table below, under the old tax rules a private landlord and 40% tax payer with a rental income of £12,000 p.a. and mortgage interest costs of £5,400 p.a. would be left with an after-tax profit of £3,960 p.a. From April 2020, net profit would reduce to £2,880 p.a.

BTL Mortgage Tax Relief Change

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