Changes to Buy to Let Rules and Capital Gains Tax

If you’re a private landlord who is letting a property in the UK, expect to see a lot of changes during the upcoming tax year. As you know, the government is slowly doing away with the old regime where landlords could deduct 100% of their mortgage interest payments from their rental income to reduce their overall tax bill. Sadly, this practice will no longer exist come 2021 due to new buy-to-let laws.

Read our blog to see how the new buy-to-let tax rules affect you and call Thobani Accountants for a free, no obligation chat. We’re happy to discuss your situation and find a solution that works best for you and your financial goals. 

Can You Still Claim Mortgage Interest in 2020?

Yes, you can still deduct mortgage interest payments from your rental income to reduce your overall tax bill. Unfortunately, this is a dying practice, as the percent you can deduct before tax is slowly decreasing. See the chart below. 

Financial YearMortgage Deduction Rate

Because landlords won’t be able to deduct their mortgage interest payments from their rental income in 2020. the government will grant a tax credit, depending on the income tax band a landlord falls under. 

What are the New UK Income Tax Rates and Brackets for 2019-2020?

Despite the decrease in mortgage interest payments, the government has increased the personal allowance (which is how much you can earn before having to pay income tax) to £12,500 a year. Higher-rate and additional-rate thresholds have also been  increased, as shown below.

BandPrevious ThresholdNew ThresholdIncome Tax Owed
Personal AllowanceUp to £11,850Up to £12,5000% Tax Free
Standard RateBetween £11,851 and £46,350Between £12,501 and £50,00020%
Higher-RateBetween £46,351 and £150,000Between £50,001 and £150,00040%

What is the Income Threshold for Capital Gains Tax?

The government also increased the Capital Gains Tax (CGT) allowance from £11,700 to £12,000 for the 2019-2020 tax year. Because of the increase to the CGT allowance, buy-to-let property owners can now make more of a profit on the sale of a second property. Landlords must pay either 18% or 28% CGT tax.

Please note: As of 6 April 2020

You must pay any CGT tax after selling your property within 30 days of the completion date to avoid heavy penalties and interest from HM Revenue & Customs. You must pay CGT tax on properties you gifted to family or transferred into trusts, too. Due to this shift in regulation, you’ll have less time to pay your CGT tax than before. This is because landlords were previously asked to report their capital gains on their self-assessment tax return and pay it back by 31 January of the following year. Now you must pay your CGT tax back within 30 days of the sale, and not at the end of the tax year, due to new buy-to-let laws.

Changes to Private Residence Relief in April 2020

Landlords should be aware that the rules around Private Residence Relief (PRR) will also change come April 2020. Changes to Lettings Relief and Final Period Exemption will affect how much you are expected to pay in CGT when looking to sell your property.

Changes to Lettings Relief

As of April 2020, only landlords who live in the same property as their tenant(s) can claim up to £40,000 (£80,000 per couple) in Lettings Relief to help reduce the amount of CGT owed. You cannot claim Lettings Relief if you live at a different property than your tenant(s) like you can under current rules.

Changes to Final Period Exemption

As of April 2020, Final Period Exemption will be limited to 9 months of ownership as opposed to 18. This means that any gains you make in the final 9 months of ownership will be exempt from CGT. Please note that landlords who currently let out their old home can qualify for Final Period Exemption relief. 

How the New Buy-to-Let Laws Affect You

Unfortunately, it’s not good news for landlords. Come 2020. a landlord must declare their rental income and pay the full tax on it before being able to claim back a 20% or 45% tax credit. Landlords who were once making a small profit from letting could now face a financial loss due to being forced to pay a higher tax on their rental income. Landlords could even be forced to move into a higher tax bracket just by having to declare their rental income, salary and pensions. 

What can you do to avoid these pitfalls? Landlords are now establishing themselves as limited companies in an effort to avoid rising income tax rates. By becoming a corporation, higher- and additional-rate landlords can avoid having to pay 40-45% in income tax and only be asked to pay a 19% corporation tax instead. 

If you need help becoming a limited company or want landlord financial advice, contact Thobani Accountants. We have years of experience helping landlords like you navigate income, Capital Gains and corporation tax.