Before You Continue…

Our website uses cookies. By continuing to browse the site, you are agreeing to our Privacy Policy.

OK - continue
logo
Search for mortgage help
CALL US:  023 8098 0304
Mobile menu bars Close mobile menu
mortgage calculator mortgage calculator
request a call back Request a Callback
email us info@themortgagehut.net
call for mortgage advice chat online now
Search for mortgage help

Specialist Mortgage Help

  • First Time Buyers
  • House Mover Mortgages
  • Bad Credit Mortgages
  • Remortgaging
  • Equity Release
  • Self Employed Mortgages
  • Buy to Let Mortgages
  • Expat Mortgages
  • Commercial Mortgages

Useful Links

  • Home
  • Contact us
  • Mortgages
  • Mortgage Insurances
  • About Us
  • Customer Reviews
  • Refer a Friend Scheme
  • Expert Articles
  • News
  • Sitemap
  • New Build Mortgages
  • CIS Mortgages Explained

Privacy Settings

  • Privacy Policy

Buy-to-Let Mortgage Interest Tax Relief Explained

  1. Home
  2. Expert Articles
  3. Commercial Mortgages
Buying a second property via an interest-only buy-to-let mortgage used to come with a level of tax relief that made it considerably more profitable for high earners to be landlords, but changes that came in April 2017 have changed all that, and the old mortgage tax relief system is on its way out, replaced with a mortgage interest tax relief credit system that will come into full effect in 2020.

So, what is the BLT Mortgage Tax Relief System now and how does it change from what used to be?



When you pay tax on your rental income (new system from 2020)


Private landlords must declare the money brought in from rental as income for income tax. This has two main effects:

  • Their income crosses a band threshold, pushing them into a higher tax bracket
  • They have to pay income tax on the rental income

Example:

John has a buy-to-let mortgage on his property that he rents out at £1,100 per month. The mortgage costs him a flat £500 per month.

From April 2020, John will have to declare that full £1,100 as income, totalling £13,200 per year. As John earns £45,000 in his normal job, so this income pushes him slightly into the higher rate band of tax. £8,200 will be taxed at 40% (totalling £3,280) while the first £5,000 will be taxed at 20% (£1,000).

The total tax John will pay on his rental earnings is £4,280.

However, the new system also returns a tax credit of 20% on the total mortgage interest paid. In this case, that’s £1,200 that will be credited to John.

Once John’s mortgage and tax are accounted for and his credit applied, his profit on his rental property (not considering periods of no occupancy or maintenance and repair) will be £4,120 for the year.

How the old system used to work

Prior to 2017, John would have been charged income tax only on the profit for his rental – that is the rental amount with the mortgage accounted for. In this case, he would have been taxed only on £5,200 (£13,200 minus £6,000 in mortgage payments). This would have been a total of £1,080 and would have left him £6,120 in net profit for the year - £2,000 less paid in tax.

The interim system – 2019 to 2020 year

Somewhat confusingly, in the years between 2017 and 2020, the changeover has been gradual. The current tax year is the last interim year of 2019/20.

For this single year, 25% of the income counts as the old system, with the remaining 75% taking the new rules.

For John, this would mean that one quarter of his taxable income is £1,800 (calculated as £3,300 - £1,500), and the remaining £9,900 is added in full. His total value for income tax purposes is £11,700.

This would result in an income tax bill on the rental portion of John’s income to be: £3,680.

He would also receive a 20% credit on the £4,500 of mortgage interest from the 75% portion, providing him a rebate of £900.

Under this interim system, John’s total net profit for the year after taxes, paying the mortgage, and receiving the credit would be: £4,420 - £300 better off than next year.

Being a business – lowering your tax thought incorporation


The new mortgage interest tax relief rules only apply to private landlords. For businesses letting out property, tax is paid only on the profits the business makes, and thus the mortgage value is deducted prior to the tax calculation.

In simple terms, this means that businesses effectively use the old system and not the new one.

For many, this is a strong reason to change from being a private landlord to an incorporated business – and it’s not the only tax advantage of doing so, as your accountant could explain.

However, it’s important to understand that it would require you to transfer any currently owned properties into the business and that will incur a stamp duty payment which could easily wipe out any gains you might get from the superior tax relief.

For many, it’s best to accept the new system for any currently owned properties and set up a limited company for future expansion.

Buy-to-let advice from The Mortgage Hut


Here at The Mortgage Hut we have advisors who can help you with your BTL and landlord enquiries, as well as being able to find you the finest interest-only mortgages with staggeringly low rates. Fill in our simple form or give us a call today for more information.
Giacomo Stevens
Commercial Mortgages Expert Article by
Giacomo Stevens (Operations Director)
The Mortgage Hut

Looking for a Mortgage?

Find out if you're eligle in a couple of clicks, with no hidden credit checks.

Get Started

Related Commercial Mortgages Information

  • Care Home commercial mortgages
  • Dental Practice commercial mortgages
  • Commercial funeral home mortgages explained
  • Can I get a commercial mortgage to open a hairdressers?
  • Doctor's Surgery Finance
  • Semi-Commercial Mortgages
  • Interest only commercial mortgages explained
  • Nursery/Childcare Home Finance
  • Getting a commercial mortgage to buy a restaurant
  • What type of mortgage do I need to buy a bed and breakfast?

Looking for a Mortgage?

Find out if you're eligle in a couple of clicks, with no hidden credit checks.

Get Started

Follow us on social media for updates

  • Like us on Facebook
  • Follow us on Twitter
  • See us on instagram
  • Watch us on YouTube

Contact The Mortgage Hut

Head office address of The Mortgage Hut
SOUTHAMPTON (HQ)
14 College Place
Southampton
Hampshire
SO15 2FE
Head office phone The Mortgage Hut
023 8098 0304
Head office email The Mortgage Hut
info@themortgagehut.net
Contact Us

The Mortgage Hut Limited is an appointed representative of Mortgage Advice Bureau Limited and Mortgage Advice Bureau (Derby) Limited which are authorised and regulated by the Financial Conduct Authority.

The Mortgage Hut Limited. Registered Office: 14 College Place, Southampton SO15 2FE Registered in England Number: 07629941

Contact Us

Important Information

  • The guidance and advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.
  • Some products are not regulated by the Financial Conduct Authority.
  • Please note that The Mortgage Hut is not responsible for the accuracy of the information contained within any linked sites accessible from our website.
  • Your home may be repossessed if you do not keep up repayments on your mortgage.
  • There may be a fee for mortgage advice.
  • The actual amount will depend upon your circumstances.
  • The fee is up to 1% and a typical fee is £748.

Data Protection & Privacy

You voluntarily choose to provide personal details to us via this website.

Personal information will be treated as confidential by us and held in accordance with the Data Protection Act 1998.

You agree that such personal information may be used to provide you with details of services and products in writing, by email or by telephone.

When you use our website, we access your device/computer to set cookies and collect data.

We do this so it works, is secure and delivers the best browsing experience.

We also collect data to study how people use our site and help us improve our services and tailor our marketing.

For more information see our Privacy Policy.

back icon
close icon

Specialist Mortgage Advice

Mortgage Advice

Mortgage Advice
Get Started
Mortgage Advice

Mortgage Advice

Remortgage Advice

Remortgage Advice
Get Started
Remortgage Advice

Remortgage Advice

Buy to Let Mortgage

Buy to Let Mortgage
Get Started
Buy to Let Mortgage

Buy to Let Mortgage

Is the mortgage for your home or a business venture?

Residential Button Residential Hover Button
Buy To Let Button Buy To Let Hover Button

Are you buying or remortgaging?

Residential Button Residential Hover Button
Buy To Let Button Buy To Let Hover Button

Have you found a property yet?

Yes Button Yes Hover Button
No Button No Hover Button

Is the property house or a flat?

House Button House Hover Button
Flat Button Flat Hover Button

What is the property’s estimated value?

£

Deposit amount or equity?

£

Have you got any adverse credit?

Yes Button Yes Hover Button
No Button No Hover Button

What types of adverse credit?

Next Button Grey Next Button Blue Next Button White

What is you combined annual income (before tax)?

£

Sourcing Mortgages…

Nicola Arbon

“There's a reason why over 500 clients rate us as Excellent.”
Nicola Arbon, Managing Director and Mortgage Guru

Green Tick

Congratulations, we've successfully found you multiple mortgage options.

Next Button Blue Next Button White

Please enter your name to send you the results

Please enter the best email to send you the results

What is the best number to reach you on?

What day & time best suits you?

Next Button Blue Next Button White

Thank you

logo

A member of The Mortgage Hut team will review your enquiry & we’ll be in touch to discuss in more detail & to advise on the options available to best suit your needs.

Head office phone The Mortgage Hut 023 8098 0304