Buy-to-let mortgages for property purchases have fallen by around 40% since 2015, according to a recent report.

This follows the introduction of several tax changes, which were designed to dampen down the housing market and make home ownership more affordable.

The changes include:

  1. A four-year phase out of higher rate tax relief on mortgage interest for individuals
  2. Introduction of a 3% stamp duty land tax (SDLT) surcharge for additional residential properties
  3. Removal of the 10% Wear-and-Tear allowance for furnished lettings

The main challenge is for higher rate taxpayers with borrowings against their residential letting portfolio.  Until recently, they could deduct the full amount of the mortgage interest payments from their rental income, before calculating how much tax was due. With effect from 6thApril 2017, HMRC started to phase out the higher rate tax relief.

From 2017/18 the higher rate relief is being reduced by 25% each year until 2020, at which point the only relief available will be at the basic rate.  The current rate of higher tax relief on this for the tax year 2018/19 is 50%.

This means that landlords, with income in the higher rate band, will see an increase in their tax liabilities on their rental surpluses. This is likely to be compounded with rising interest rates.

Example of the impact of the withdrawal of the higher rate relief 

In an example from the report, a private landlord, in the 40% tax bracket has a rental income of £5,000 per month and mortgage interest costs of £4,000 per month. Under the old tax rules, they would pay £400 tax per month leaving £600 profit.

Under the new rules, that monthly tax bill would become £1,200, in 2020:


Gross Rent £5,000
Tax @40% £2,000
Basic rate relief on mortgage interest
£800 (£4,000@20%)
Tax payable 1,200


That obviously is a very significant change – but you can do things about it.

Here at Johnston Kennedy DFK, we provide tax advice on buy-to-let properties.

Call us on +44 (0) 28 9045 6333 or email info@johnston-kennedy.comfor more information

This blog post provides general information only and may not apply to your particular circumstances.