Taxation plays a huge part in the supply of UK private residential sector properties
The tax regime for residential property rentals is pushing out the amateurs
by regeo
11 May 2020 3 min read

The UK private residential property market is worth in excess of £5 trillion. Roughly £1 trillion of this is rented by tenants from Private Landlords (“PL”). The vast majority of these PL are private landlords, participating in the “buy to let” rental market. Institutional ownership of the UK PRS is currently negligible.

In 2015, the then Chancellor, George Osbourne, announced a series of tax changes for the “buy to let” PL. These included the 2016 introduction of the “second home surcharge” on UK domiciled private landlords; the 2017 start of a phased removal of mortgage interest relief on rental income (2017-2020) available to those landlords; and, the phase introduction (2017-2020) of a new tax credit. 

The changes are extremely significant to the PL as they will no longer pay income tax at their marginal rate on rental profits (i.e. gross rent after deducting mortgage interest payments), instead they now pay income tax at their marginal rate on total rental turnover (i.e. gross rent).

Impact on tax changes on the PRS market

PL who are individuals (the vast majority of the PRS market in the UK) and who have any degree of bank borrowings are now adversely affected by the removal of interest relief. The higher their mortgage borrowings the faster their net rental income is being depleted by rapidly rising tax, with some now beginning to face loss making situations. However, and maybe unfairly, PL individuals who have no bank borrowings and/or who are lower rate taxpayers are unaffected by the “buy to let” tax changes.

A PL landlord before April 2017 with a mortgage on their property was able to deduct all of those mortgage interest payments from the rental income received before paying tax on the residual balance.  For example, if rental income was £10,000 per annum and annual mortgage interest payments were £9,000, then taxable income was only £1,000 producing a tax bill of just £200 for a 20% tax payer. For further details please see table below.

Since the start of the 2017-2018 tax year the new “buy to let” taxation regime noted earlier has begun to be phased in.  Every year during the transition period, will see the proportion of mortgage interest payments that can be deducted from rental income decrease by 25% and the portion of those payments that qualify for the new 20% tax credit increase by 25%.  By 2020 a PL will not be able to deduct any of their mortgage interest payments from their rental income before paying tax.  Instead the entire amount of any mortgage interest payment will then qualify for 20% tax relief.

This means that a PL receiving £10,000 in rental income and paying £9000 in mortgage interest payments will end up paying tax on the full £10,000 of rental income, although the amount payable will vary depending on their marginal tax bracket.  PL are then able to deduct the tax credit from their tax bill leaving them with a final amount payable as tax on their rental income.  Those in higher tax brackets will end up paying much more tax than before because they will pay tax on their gross rental income at their full marginal rate, but only receive 20% tax relief on their mortgage interest payment instead of the full amount.

These personal tax changes have become an important factor in the evolution of the “buy to let” market, with PL using the opportunity to restructure and sell portfolios. This activity is producing a softer market for sales and a reduction in the supply of related properties, thereby underpinning stronger rents and stronger rental growth.


Many commentators are postulating a huge pent up demand for rental properties by tenants and a reduction of supply by landlords will occur after lock down. Whatever the scenario, income and capital taxation plays a huge part in this dynamic which cannot be underestimated.

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