Buy-to-let facing headwinds

Post by Mearns & Company in News

Some buy-to-let (BTL) investors are facing a costly future.

In the post-election Budget of 2015, the then Chancellor announced a change to the tax treatment of interest paid on BTL residential mortgages. Instead of the interest being fully offset against rent for income tax purposes, there would be a 20% (non-reclaimable) tax credit for interest paid. This reduced the tax relief received by higher and additional rate taxpayers to basic rate, halving or more than halving their tax savings.

To limit the immediate effect of the change, the new system was phased in over four years, starting in April 2017. The impact was also cushioned by very low interest rates, meaning there was less interest on which to lose tax relief. By autumn 2021, BTL investors were able to find two-year fixed rate mortgages with a headline rate of just 1%.

Interest rate hit

Twelve months on, the picture is rather different, and the best two-year fixed rates are around 3.0%. Even if the rate does not move higher – a distinct possibility – it can have a serious effect on net income for BTL investors, as the example calculation below shows, based on a 40% taxpayer. If the mortgage rate rises above 4.25%, then all net income will be eliminated.

The 2015 interest relief changes encouraged new BTL investors, particularly those owning more than one property, to purchase their properties via limited companies. In this structure, interest is fully offset against rent for corporation tax purposes. However, this route loses some of its appeal following the recent increase in dividend tax rates and the rise in corporation tax rates from 19% to 25%, currently due next April. For existing BTL owners, transferring to a limited company remains unattractive because of the capital gains tax and relevant property transfer tax involved.

Energy ratings shift

Additional interest costs are not the only extra expenses that threaten BTL owners. A year ago, the Department for Business, Energy and Industrial Strategy (BEIS) launched a consultation on improving the energy performance of privately rented homes in England and Wales. The consultation ended in January 2022, with regulations originally expected this autumn. The BEIS’s preferred option is:

  • From 1 April 2025, a minimum energy performance certificate (EPC) rating of C would apply to properties with a new domestic tenancy or where an existing tenancy is renewed.
  • From 1 April 2028, all tenancies would be subject to the EPC C rating.

Extra costs considered

The consultation estimated that the average landlord would spend £4,700 per property to achieve the C rating. It also proposed an upper spending limit of £10,000, beyond which an exemption would apply from the rules.

The combined effect of higher interest rates and higher EPC thresholds – and a six month rent freeze in Scotland – is something BTL investors should carefully assess now, so that the appropriate decisions can be made.


The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

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