Landlords face tax bombshell

Written by RLA

New research has shown that over sixty per cent of private sector landlords face being pushed from the basic to higher rates of income tax as a result of Government reforms. In his Summer Budget, the Chancellor announced that from 2020, mortgage interest relief for residential landlords will be restricted to the basic rate of income tax…

New research has shown that over sixty per cent of private sector landlords face being pushed from the basic to higher rates of income tax as a result of Government reforms.

In his Summer Budget, the Chancellor announced that from 2020, mortgage interest relief for residential landlords will be restricted to the basic rate of income tax.

Whilst landlords paying the basic rate might feel unaffected by the change, because tax will instead be applied to turnover, rather than profit, many are likely to find themselves pushed into the higher rates of income tax, despite their income not having increased.  This has now been confirmed by new research by the Residential Landlords Association (RLA).

In a survey of almost 1,200 landlords, of those currently paying the basic rate of income tax, over sixty per cent said that the changes announced by the Government would push them into either the higher or additional rate of tax.

The RLA has met with officials at the Treasury to raise concerns about the impact the mortgage interest reforms will have on the ability of landlords to invest in much needed new housing.

RLA policy director, David Smith, said

“The findings of our survey are deeply concerning. Many landlords currently paying the basic rate of income tax face the prospect of a nasty surprise when they meet with their accountants.

“Having felt that they were not affected by the Budget measures many will seriously consider whether it is worth continuing in the market when faced with this tax bombshell. It cannot be right that many landlords face seeing their income tax increase without an increase in their income.

“All the evidence shows that we need more, not less, rented housing. With almost ninety per cent of landlords being individuals renting out just a handful of properties each, it is only by supporting this group that we will boost the supply of homes to rent. The Budget announcements risk undermining the potential for growth.

“Even at this late stage we are calling on the Government to pause and provide more time to assess the impact on market.”

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About the author



The Residential Landlords Association (RLA) represents the interests of landlords in the private rented sector (PRS) across England and Wales. With over 23,000 subscribing members, and an additional 16,000 registered guests who engage regularly with the association, we are the leading voice of private landlords. Combined, they manage almost half a million properties.


  • Hi there.
    I completed the survey and had to put that I am a higher rate tax payer, so it looks on the surface as though nothing has changed. In fact, as my income is approximately £50,000 pa, only a small part of my current income is taxed at 40%. Because of the tax on turnover, initially I will pay £16,000 tax instead of my current £8,000 – a doubling of my tax bill. This is without any interest rate rise. As interest rates rise the sky is the limit in terms of my tax liability! A truly bonkers tax.

  • I suspect that this is the result of a flawed survey as many landlords who would not be affected by the chances would not have taken part, as I didn’t.

  • Alan i dont think this is flawed at all, the vast majority of Landlords remain unaware of the tax bombshell, worse still so do a lot of their accountants. “if you are a basic rate tax payer you will be unaffected” has lulled many into not investigating further. I think the actual figure will be higher than that.
    Many Landlords will be catapulted into high rate tax with their new artificially inflated income. As pointed out above a lot of these landlords will not become aware of the catastrophic effect until they they actually get a rather higher tax bill and in many cases, no profit to cover it, in a few short years time. This “tax” undermines the basic fundamental that PROFIT= INCOME – EXPENSES by removing the core expense of this particular business. Which as pointed out by many econic organisations, tax advisors etc is “just plain wrong”.

    Some Landlords with just 1 or 2 properties could be faced with no profit and a tax bill running into thousands as demonstrated by HMRC own example below:

    Observations from this very simple example below we can see that :

    1. A 20% tax rate payer is pushed into the 40% band with the new proposals
    2. The taxable property profit Of £1,200 will be deemed by HMRC to be £12,000
    3. The “real profit” of £1200 was initially taxed @20% making tax due £240
    4. The tax payable increases by £1800 making a total of £2040
    5. The tax liability completely wipes out the profit and leaves a further liability of £840.
    6. In percentage terms £2,040/£1,200 x 100 is 170%, the effective rate at which tax will be paid.
    7. This simple model is no longer viable, the landlord must sell up, pay down borrowings or increase rent.


    Prop rental income is £15,300, or £1,275 pcm (a 3, 4 or 5 bed HMO maybe depending on location)
    Prop Val £275K
    Expenses: 10% agent fees (£1,530) and a few repairs, gas safe, insurance etc =£3,300
    Finance on a loan of £216k (78.5%LTV) @ 5% = £10,800
    Net profit £1,200

    These figures are very realistic and common place for individual Landlords, this example represents a large number of landlord positions.

    If the landlord had a second property, also with a profit of £1,200, his tax in 2020/21 would go up by £2,640 compared to his liability if he only had one. The effective tax rate on this second property would be £2,640/£1,200 x 100, or 220% of the rent.

    Under the current system this landlord would have remained a basic rate taxpayer even with 2 properties. Under the proposed system he will very much be a higher rate taxpayer.

    After April 2020 (when the restriction will be fully implemented) landlords who incur interest (and other associated finance costs) on residential properties that they let will need to calculate their tax differently. You will no longer be able to deduct interest from your rental income to arrive at your taxable profits, you will instead receive a reduction from your income tax liability equivalent to 20% of those interest costs. If that means you become a higher rate taxpayer (or you were anyway) then you will have to pay more tax as a result of this change.

    Please see the example below. This comparison is designed to show the effect of the change, not to calculate someone’s exact tax liability. The tax bands were rounded off for simplicity, and applied to both years so as not to confuse the result of the calculation.
    Before restriction 2016-17 £ After restriction 2020-21 £
    Salary 40,000 Salary 40,000
    Property income 15,300 Property income 15,300
    Less Other costs (3,300) Less Other costs (3,300)
    Less Finance costs (10,800) Less Fin costs (0)
    Property profits 1,200 Property profits 12,000
    Taxable income 41,200 Taxable Income 52,000
    Less Personal Allowance (11,000) Less Personal Allowance(11,000)
    Tax due on 30,200 Tax due on 41,000
    Tax at 40% 3,600
    Tax @ 20% 6,040 Tax @ 20% 6,400
    Total Tax 6,040 Total Tax 10,000
    Less Finance Costs @ 20% (2,160)
    Final Tax 6,040 Final Tax 7,840

    Please do get in touch if that doesn’t clarify the mechanism.
    The Bill is subject to parliamentary scrutiny and so there are no guarantees as to what will become law before the Bill receives Royal Assent in Autumn.
    Megan Shaw
    Product Owner – Property Income & REITs
    HMRC, Room 3/64, 100 Parliament Street, London, SW1A 2BQ
    03000 585628

  • Well, since this new tax proposal was first put forward and currently looks likely to happen all I can say is that it will more than likely cause my wife and I some serious financial problems. There is no way that we can sustain such a heavy tax burden, most especially when the interest mortgage payments make up a significant part of our costs. We have both worked very hard, married 29 years, never taken any benefits, but built up a small property portfolio in lieu of a pension. Now it all looks to be at serious risk due to this new tax. 54 next January and now very concerned…….was it all worth it, not if this tax comes in. Might as well get rid of the lot and claim benefits. Very disappointed with this government who are supposed to be the government supporting hard working and enterprising people. One main concern I have is that to sell any properties, in order to get the best price I need to repossess and sell with vacant possession. I just wonder if this chancellor has thought this through, or has simply bowed to a few individuals with ‘green envy’.

  • A simple vote winner, which nullifies policies of the opposition parties. Landlords are the new bad-guys policymakers ( who have some responsibility for the housing shortage in the first place ) can use to get revenge votes. Are the Conservatives really what they say they are? I suppose they have nothing to lose.

    Turnover tax is used where the taxman believes there is rampant tax avoidance. But they don’t seem to understand that this is an essential service in a country where social housing is not organised well enough to be supplied to those who can’t afford anything else. Who will buy when the next property downturn happens? Only the biggest and strongest landlords; those with very little existing mortgages. Banks will become even more selective about who they lend to, because the market will be more brittle. So the net effect will be small landlords will sell-out to large more established landlords who don’t have mortgages, bureaucracy will go up because quality will go down ( since improving quality will no longer save significant tax) property values will stagnate ( no new buyers ) and rents will go up ( fewer suppliers with more control of the market ).

    Turnover tax may be fine for coffee shops and such, but not for essential services in short supply.

  • All that has been said about this tax makes perfect common sense to all except this government, as usual no joined up thinking, having relaxed the controls on private pensions they should be encouraging investment of this pension money into the property market by offering tax breaks / incentives, perhaps allowing say 75% of a pension pot to be taken tax free if invested in affordable rental property instead of penalising small landlords, together with the 3% stamp duty on second homes coming in in April( except when 15 or more properties are being purchased) will kill off the market for small investors leaving it to the big boys and foreign investors.

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