Mortgage tax relief changes for property investors

Under the new law, landlords can offset 75% of their mortgage interest against profits. However, this will be reduced by 25 percentage points each year, until it reaches zero in 2020. 

The cuts were detailed in former chancellor George Osborne’s 2015 Budget, giving investors adequate notice, and the four-year phasing process will help them adapt to the changes.

Higher-rate taxpayers will be worst hit, although a significant number of investors could move into that tax bracket over the next four years if the income they make from renting increases. This is certainly a possibility, given the strong rental market.

Investors appear to have taken a number of different approaches to weather the changes, including switching to commercial and semi-commercial property, rather than residential, and forming limited companies.

Others will be adapting the geographical make-up of their property portfolios to maximise yields. For example, they may be selling their London properties, where tax-applicable profits tend to be higher, with better yields.

We will have to wait and see how much these changes will affect property investors and how they will be able to maximise their profits by adapting their business models. What should instil confidence is the fact that the market has proved resilient to previous buy-to-let changes, such as the 3% hike in stamp duty last year.

But, despite the government’s clamp down, investors are not being easily deterred. And with historically low interest rates, a shortage of UK housing stock, a buoyant rental market and a broad offering of buy-to-let mortgage products mean many still see these types of properties as a worthwhile investment.