Why Buy-to-Let Profits are Under Pressure
In 2015, the government announced that tax relief on finance costs for individual residential landlords would be restricted to the basic rate of Income Tax. The restriction was phased in from 2017/18 and has applied in full since 2020/21.
The change affects how tax relief is calculated. It can increase a landlord’s tax bill, particularly where property income falls within the higher or additional-rate bands.
What are ‘finance costs’?
The term ‘finance costs’ covers several types of expense incurred by buy-to-let landlords. Mortgage interest is usually the most significant, but qualifying costs can also include:
- Interest on loans used for the property business, such as a loan used to buy furnishings
- Interest on an overdraft used for the property business
- Certain fees and incidental costs incurred in obtaining, refinancing or repaying a mortgage or loan
Capital repayments of a mortgage or loan do not qualify. This list is not exhaustive, so speak to a THP accountant if you are unsure whether a particular cost qualifies.
How finance-cost tax relief works now
Since 2020/21, individual residential landlords have generally been unable to deduct finance costs when calculating taxable property profit. Instead, they may receive a basic-rate Income Tax reduction.
For 2026/27, it is 20% of the lowest of the relevant finance costs, property-business profits and adjusted total income above the Personal Allowance. The reduction cannot create a tax refund, and unused finance costs may be carried forward in some circumstances.
How the finance-cost restriction can reduce after-tax profit
The effect on your after-tax profit will depend on your portfolio, rental income, finance costs and wider tax position. Take a simplified example of a higher-rate taxpayer in England, Wales or Northern Ireland who receives £1,150 a month in rent, pays £700 a month in mortgage interest and has no other allowable property expenses.
Under the rules that applied before 6 April 2017, and using a 40% tax rate for comparison, the Income Tax attributable to the property would have been £2,160. This would have left cash profit after mortgage interest and tax of £3,240.
Under the 2026/27 rules, assuming that all the taxable property profit falls within the 40% band and the full finance-cost tax reduction can be used, the Income Tax attributable to the property is £3,840. This leaves £1,560 after mortgage interest and tax: £1,680 less than under the former rules.
This is an illustration, not a universal result. Other income, allowable expenses, losses, the Personal Allowance and the limit on the finance-cost reduction can change the result. From 6 April 2027, separate property-income rates of 22%, 42% and 47% will apply in England, Wales and Northern Ireland. The finance-cost reduction will also be calculated at the property basic rate of 22%, so this example will change then.
Higher SDLT rates on additional properties
For purchases completing on or after 31st October 2024, the higher SDLT rates for additional dwellings are normally five percentage points above the standard residential rates. From 1 April 2025, the standard nil-rate band returned to £125,000. These rules apply in England and Northern Ireland; Scotland and Wales use different property taxes.
The SDLT bands from 1st April 2025 are:
| Portion of purchase price | Standard rate | Buy-to-let/second home rate |
| Up to £125,000 | 0% | 5% |
| £125,001 - £250,000 | 2% | 7% |
| £250,001 - £925,000 | 5% | 10% |
| £925,001 - £1.5m | 10% | 15% |
| Above £1.5m | 12% | 17% |
So, if you purchase a buy-to-let property for £300,000 and the higher rates apply, you will pay 5% SDLT on the first £125,000, 7% on the next £125,000 and 10% on the final £50,000. That gives total SDLT of £20,000.
What can landlords do when profits are under pressure?
There may be ways to improve your after-tax position, but the right approach depends on factors such as your portfolio size, how the properties are owned, your borrowing, your wider income and your long-term plans. Whether you are married or in a civil partnership may also be relevant.
Transferring properties to a limited company is not automatically beneficial. The answer depends on the taxes and refinancing costs triggered by the transfer, expected profits, how you plan to take money from the company and how long you intend to hold the properties.
THP accountants can advise you on suitable tax structures and strategies for your portfolio. For an introduction to the main options, read the other pages in this series below.
More in this series:
- Making Buy-to-Let More Profitable
- Why Buy-to-Let Profits are Under Pressure
- Should I transfer my BTL properties into a limited company?
- Could transferring rental property to your spouse or civil partner reduce your tax bill?
- How to improve Buy-to-Let income
- Personal Buy-to-Let mortgages & re-mortgages – the facts
- Selling a buy-to-let property: tax points to check
- How THP can help you as a Landlord
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How THP can help you as a Landlord
The information included on this page should be regarded as general advice only. You should always seek professional advice tailored to your own specific circumstances before taking any action based upon it.
