UK buy-to-let landlords managed to claw back more tax relief than ever despite no longer being able to fully offset their mortgage interest costs.
The amount claimed rose to £18.5 billion in the 2020/21 tax year, the last for which accounts were filed – up from £18.1 billion the previous year. This was according to analysis by London estate agent Ludlow Thompson.
Given that there are estimated to be around 2.65million landlords in the UK, this would equate to an average of £6,981 per person.
Writing it off: The amount UK buy-to-let landlords claimed in tax reliefs rose to £18.5billion in the 2020/21 tax year, up from £18.1 billion the previous year
The increase in tax relief happened in spite of a reduction in the amount of tax relief landlords can claim on mortgage interest.
Landlords could previously deduct mortgage expenses from their rental income before tax, reducing their overall bill.
This meant a landlord with interest mortgage payments of £400 a month on a property rented out for £1,000 a month in rent would only pay tax on £600 of that income.
However, this started to be phased out in 2017 before being stopped in April 2020.
Now landlords receive a tax credit, based on 20 per cent of their mortgage interest payments.
|Tax year||Annual rental income||Annual mortgage interest||Rental income that is taxed||Tax on rental income||Mortgage interest relief||Net profit after tax|
A higher rate taxpayer landlord with mortgage interest payments of £400 a month on a property rented out for £1,000 a month now pays tax on the full £1,000, but with a 20 per cent rate on the £400 that is being used towards the mortgage.
This is less generous for higher-rate taxpayers, who previously received a 40 per cent tax relief on mortgage payments.
How are landlords claiming more tax relief?
The obvious answer is to think that the number of UK landlords must be increasing, and to some extent this is correct.
There are around 2.65 million landlords in the UK, according to the latest HMRC figures – the highest ever recorded.
But while landlord numbers may be growing, many also appear to be selling some of their properties.
A series of tax changes appear to have stunted the growth of buy-to-let in recent years
Between 2017 and 2020 the number of rented households in England dropped by around 250,000, according to estate agent and property consultancy Hamptons.
Nathan Emerson, chief executive of estate agent body Propertymark said: ‘As house prices rise, our member agents are reporting more small portfolio investors exiting the private rented sector.
‘This is caused by the pressures in meeting increasing regulation and the enticing heightened price of their properties.
‘As costs to landlords increase such as those associated with meeting EPC requirements, premium interest rates on buy-to-let mortgages and additional stamp duty, it’s inevitable that investors will look to claim back any costs available to them.’
What are landlords claiming for?
Thanks to the new 20 per cent tax credit, mortgage interest still made up the largest proportion of tax relief claimed by landlords in 2020/21 at £6.9bn, representing 37 per cent of all tax relief claimed.
Property repairs and maintenance made were the second, with a total of £4.5billion claimed back – almost one quarter of the overall figure.
Deductible: Landlords can offset the fees they pay to professionals such as estate agents and lawyers against their tax bill
Tax relief can be claimed on a wide range of other costs. This includes lettings agents fees and accountants as well as both property insurance and landlord insurance.
For those who own leasehold flats, the service charge and ground rents can also be deducted from the tax bills.
Landlords who opt to pay water, heating or council tax for tenants may also claim these costs back.
Can landlord claim energy improvements against tax?
Landlords face a dilemma over what they class as an improvement and what they class as a repair.
Whilst you cannot deduct the cost of improvements from the rental income, you can deduct general maintenance and repairs.
Allowable expenses for landlords
1) 20 percent tax credit on mortgage interest
2) General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
3) Water rates, council tax, gas and electricity
4) Insurance, such as landlords’ policies for buildings, contents and public liability
5) Costs of services, including the wages of gardeners and cleaners
6) Letting agent fees and management fees
7) legal fees for lets of a year or less, or for renewing a lease for less than 50 years
8) Accountant’s fees
9) Ground rents and service charges
10) Direct costs such as phone calls, stationery and advertising for new tenants
11) Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs
Examples of repairs would be replacing a broken down boiler or redecorating between tenancies to restore the property to its original condition.
At present, all rental properties in England and Wales need to have an energy performance certificate rating of at least E in order to be let, unless they are exempt.
EPC is a rating scheme which bands properties between A and G, with an A rating being the most energy efficient and G the least efficient.
However, in line with its ambition to reach net zero carbon emissions by 2050, the Government is considering upping this requirement to a C rating for all new tenancies by 2025, and for all existing tenancies by 2028.
Ensuring adequate loft, underfloor or cavity wall insulation, upgrading to double or triple glazed windows, replacing the heating system, draft proofing and hot water tank insulation are just some examples of improvements that can boost an EPC rating.
According to government guidance, improvements such as replacing single-glazed windows with double glazing as well as installing up-to-date boilers or radiators could be written off against a landlord’s tax bill under repairs and maintenance.
However, other than these examples there appears to be no tax incentives for other works at present. This might include loft, under floor or wall insulation and heat pumps.
Back in 2004, the Government introduced a ‘Landlords Energy Saving Allowance’ to encourage landlords to undertake energy efficiency measures in their properties, with up to £1,500 per property available to claim against tax each year.
The policy lasted just over a decade, and other than the failed green homes grant which lasted all but six months between September 2020 and March 2021, no further incentives have been offered up.
Improvements are not tax deductible whilst repairs are. Fixing a leak could be classified as a repair.
This means at present, landlords can only claim such costs against capital gains tax when they come to sell.
Any capital improvements a landlord makes to their property can be offset against capital gains tax, which is charged at 18 per cent for basic rate tax payers and 28 per cent for higher rate tax payers.
Capital gains tax can be charged on any profit you make on an asset that has increased in value when you come to sell – so a landlord will have to make a profit to benefit from this.
Stephen Ludlow, chairman of Ludlow Thompson said: ‘There are currently no specific reliefs available to help landlords improve the energy efficiency of their properties.
‘Landlords may be able to make careful use of the repairs, maintenance and renewal allowance to replace fixtures such as boilers with more energy-efficient models.
‘There is a strong argument that the Government should provide more generous tax benefits for property improvements.
‘This would incentivise landlords to make upgrades which would improve the overall quality of UK housing stock.’
Putting your buy-to-let in a limited company to save tax
Another way investors can mitigate some of the tax changes is to invest via a limited company.
Under the limited company model, landlords can still obtain full mortgage interest relief and therefore reduce their tax bill.
Those owning within a limited company will pay corporation tax, at 19 per cent, considerably lower than the higher rate of income tax of 40 per cent.
This is one of the reasons why more companies have been set up to hold buy-to-lets between 2016 and 2021 than in the preceding 50 years combined.
According to agent Hamptons, there were 47,400 new buy-to-let companies incorporated in 2021 across the UK, a 14 per cent rise on the previous year.
However, limited companies don’t work for everyone.
‘Setting up a limited company tends to benefit higher-rate taxpayers or those with multiple buy-to-let properties,’ says Hamptons’ Aneisha Beveridge.
‘For landlords without a mortgage, or looking to buy in cash, the benefits of putting a property into a company are undoubtedly more marginal than for someone with a buy-to-let mortgage.
‘It all depends on individual circumstances and so it’s worth getting advice from an accountant or tax adviser before purchasing a buy-to-let.’
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.