The impacts of tax changes on rental income

5th July 2018

If you’re a buy-to-let landlord, you should be aware that changing your property portfolio or increasing rents has the potential to nudge you into higher income tax bands. 

With less than 6 months to go until tax returns are due for 2017/18, more than 440,000 basic rate taxpaying buy-to-let landlords are at risk following changes to mortgage interest relief. 

Before April 2017, buy-to-let landlords were able to offset their mortgage interest against income tax, but this changed when the government opted to phase out this benefit over the next 4 years. 

Instead of paying tax on your profit, by 2020/21 you will have to pay income tax on your rental income, as mortgage interest relief reduces by 25% every year until then. 

With self-assessment tax returns for 2017/18 due early next year, the way you have to declare your rental income has changed – and most landlords will see their tax bills increase as a result. 

How will selling up or increasing rents affect me?

As revealed in our previous blog, 5 FAQs for landlords, research from the National Landlords Association claimed 1 in 5 residential landlords intended to sell up this year.

If you’re considering increasing your property portfolio or raising rents, be aware that this additional rental revenue may push you into a higher tax band.

Similarly, selling a buy-to-let property will usually result in you being liable for capital gains tax (CGT).

The first £11,700 will be free from CGT in 2018/19, after that you’ll pay CGT at 28% if you’re a higher rate taxpayer. A variety of other factors determine what basic rate taxpayers will pay. 

Mortgage interest relief in 2017/18

You can claim 75% mortgage interest tax relief on rental income earned in 2017/18, but how will it affect you?

Let’s say you’re a basic rate taxpayer who charges the average rent in Bristol of £900 a month on your buy-to-let property, and you make mortgage interest payments of £600 a month. 

You would’ve received £10,800 from rental income in 2017/18 and paid mortgage interest of £7,200, which leaves you with a total taxable income of £3,600.  

Under the old rules as a basic rate taxpayer, you would’ve paid £720 in income tax on your rental income.

However, with the first phase of the new mortgage interest rules in play, you can expect an income tax bill of £1,020 on same the buy-to-let income in 2017/18. 

Self-assessment tax return

You have to complete a self-assessment tax return to pay income tax on any profits you received in 2017/18, and this has to be completed by 31 January 2019 at the very latest.

The amount you pay is determined by your income tax band, so if you’re a basic rate taxpayer you pay 20%, 40% for a higher rate and 45% for the additional rate.

The way you have to declare your rental income has begun to change, meaning most buy-to-let landlords will see their tax bills rise.

Bring us your accounts for 2017/18 at the earliest opportunity to ensure you remain compliant with HMRC and retain more of your profits.

Get in touch

If you would like to discuss how these changes may affect you or how we can help, dial 0117 973 3377 or email