Buy-to-let tax changes explained

Buy-to-let landlords have seen many changes to the way that returns on their portfolios are taxed in recent years. Major reforms, many of which were first announced in 2015 during then-Chancellor George Osborne’s infamous summer budget, have drastically curtailed the tax advantages once available to buy-to-let investors.

The phasing out of mortgage tax interest relief and adjustments to capital gains tax on investment properties are likely to have a significant impact on the annual tax bill paid by buy-to-let landlords. Additionally, changes to tax reporting requirements on investment properties could lead to HMRC collecting millions of pounds in fines from landlords unfamiliar with the new deadlines.

In the guide below, we explain all of the key buy-to-let tax changes that landlords need to be aware of. All of the reforms outlined below came into force during the tax year 2020/21, and the deadline for filing your self-assessment tax return for this period is 31st January 2022.

Capital gains reporting

As of April 6th 2020, anyone who makes a taxable capital gain on the sale of a residential investment property (i.e not the taxpayer’s primary residence) must pay the sum owed within 60 days of completion. Failure to report and pay by the deadline will incur a late-filing penalty, chargeable at the following rates:

• For filings up to 6 months after the deadline, you will get a penalty of £100.
• For filings more than 6 months late, £100 and a further penalty of £300 or 5% of any tax due (whichever is greater).
• For filings more than 12 months after the deadline, a further penalty of £300 or 5% of any tax due (whichever is greater) on top of the existing charges.

To report and pay any tax due, you need to use a Capital Gains Tax on UK property account on the government’s dedicated portal. To calculate the amount of tax due and complete your reporting, you will need the following information:

• The property address and postcode.
• The date you purchased the property.
• The date you exchanged contracts when you were selling or disposing of the property.
• The date you stopped being the property’s owner (your sale completion date).
• The value of the property when you got it.
• The value of the property when you sold or disposed of it.
• The costs involved in buying, selling or making improvements to the property (e.g agency fees, conveyancing fees, painting and decorating, refurbishments).
• The details of any tax reliefs, allowances or exemptions you’re entitled to claim (more on this below).
• The property type, if you’re a non-resident (e.g a private rental property).

The new reporting requirements do not apply if the gain on disposal, taking into account any other disposals made in the same tax year, does not incur any CGT liability. This might be the case if your gains are covered by any exemptions, tax relief, or unused losses. For example, if the gain made from the sale of the property is less than £12,300 (your annual personal allowance), and you have not made any other asset disposals in the same tax year, your personal exemption will cover the gain and you won’t have any tax to pay.

However, if you are a non-resident landlord then you must report any property disposal, regardless of whether or not the sale made you gains that qualify for taxation. This is completed via the same UK property account as resident sellers.

HMRC does not actively publicise updates to reporting requirements, as responsibility for keeping up to date with the relevant rules governing large asset transactions is deemed to fall with the seller. As such, many landlords and their legal advisors remain unaware of the 60-day deadline for declaring and paying CGT and remain exposed to late filing penalties.

If you have been hit with a fine for missing the reporting deadline you can appeal the penalty with HMRC. They consider appeals on a case-by-case basis, taking into account whether or not there is a ‘reasonable excuse’ for your late filing.

Private residence relief

If your investment property was once your main home, you’re entitled to private residence relief for the years during which you lived there. Previously, sellers also received full relief for the last 18 months that they owned the property. Following changes introduced in April 2020, this entitlement has now been reduced to cover just the last 9 months during which the property remained in the seller’s ownership.

To calculate your chargeable gain (i.e the amount from which your tax will be calculated) for CGT purposes, you deduct any private residence relief from the profit made from the sale of the property. For example:

A landlord buys a property for £300k and sells it for £750k - a gain of £450k.

The landlord owned the property for 15 years, which is 180 months. They lived in the property for 7.5 years (90 months) and are entitled to full relief for their entire term of residency plus the last 9 months during which they owned the property, so for 99 months.

99 months accounts for 55% of the term of ownership and the landlord is entitled to relief on the same proportion of their profit on the sale (£450k). This means that the landlord doesn’t pay any tax on £247,500 of the total gain.

The chargeable gain is therefore the remaining amount of £202,500.

Under the old system, 60% of the total gain would be covered by tax relief, leaving a chargeable gain of £180,000 - £22,500 less than the example above. Though this tweak to PRR entitlement might seem relatively slight by comparison to other reductions to your tax relief, it can still significantly increase your final bill.

Letting relief

Prior to April 2020, landlords could claim up to £40,000 in ‘letting relief’ when selling an investment property that was once their home before it was rented out to tenants. Under the previous rules, landlords could claim CGT relief for the time during which the property was let to tenants, deducting the lowest of the following from their taxable gain:

• The same amount as your Private Residence Relief entitlement.
• £40,000.
• The same amount as the chargeable gain made while letting out the home.

However, following changes introduced in 2020/2021, only landlords who share an occupancy with their tenants will be entitled to claim the above relief. This reform effectively abolishes letting relief as a tax deductible for the vast majority of private landlords.

Returning to the example calculation in the previous section, the landlord in that scenario was left with a chargeable gain of £202,500. Before changes came into effect, the landlord would also be able to claim £40,000 in relief for the time during which the property was let (assuming they let the property for a number of years and the chargeable gain over that time exceeds the maximum of £40k).

With relief for the final 18 months of ownership and £40,000 letting relief, the total chargeable gain prior to April 2020 would be £140,000 - a substantially lower amount than under the current rules.

Mortgage interest relief (Section 24)

Probably the most significant recent change in buy-to-let taxation rules is the restriction of mortgage interest relief. Section 24 of the Finance Act 2015 came into full force in April 2020, and its provisions restrict all income tax relief on property finance costs to the basic rate of 20%.

Prior to the introduction of Section 24, landlords could deduct their mortgage interest payments and other property finance costs (such as mortgage admin fees, interest on loans taken out to furnish a property etc) from their rental income prior to calculating their tax bill. Under the new rules, landlords pay tax on all of their rental earnings (less allowable expenses such as letting fees and repair costs) and then claim back a tax credit equivalent to 20% of annual mortgage interest.

The extent to which the loss of mortgage relief impacts your profits depends on your tax bracket. Landlords who pay the basic rate of 20% in income tax will only see a minimal impact, as the tax credit refunds the basic rate on mortgage interest.

However, for landlords in the higher and additional tax brackets the impact is quite significant. If you’re a higher rate taxpayer, the previous rules meant that you effectively received 40% relief on your mortgage interest payments. Under Section 24, you won’t get all the tax back on your mortgage repayments and instead will only receive the 20% credit, thus doubling your tax bill.

Landlords at the top of their tax bracket could find themselves pushed into a higher band as income used to settle mortgage payments will need to be declared on their tax return. Combined with your income from other sources (such as salary or pension), your rental earnings could push your total income across the higher (£50,270) or additional (£150k) rate threshold. This is more likely to affect landlords who own multiple properties in their portfolio.

For more information on Section 24, how it works, and what you can do to reduce the impact of new tax rules on your portfolio, read our full guide.

With changes to buy-to-let taxation making a substantial impact on landlord finances, it’s important to find new and creative ways to mitigate losses by boosting your yields and reducing operating costs. You can read some of our top tips for getting the most out of your portfolio here.

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