Some landlord tax bills could exceed rent profits after Budget

Some landlords with buy to let mortgages could find that a year’s profit from rent is not enough to cover their tax bill after Labour’s Budget changes.

That’s when Chancellor John Healey increased the tax rates on property by a further two percentage points from next April.

The Intermediary Mortgage Lenders Association (IMLA) calculates that the effective tax rate could reach 124% in its example of a landlord earning a £100,000 salary.

That analysis is based on a property worth £250,000, with a £150,000 mortgage and an annual profit from rent of £4,365 before tax.

At that salary, the withdrawal of the personal allowance adds to the effect of mortgage interest restrictions, pushing the tax attributable to rent income above the profit.

Landlord investment decisions

IMLA’s executive director, Kate Davies, said: “Landlords will respond differently to these changes, depending on their financial circumstances and what they want from their investment.

“Some will continue to see a strong case for holding property over the long term, particularly where they anticipate capital growth.”

She added: “Company ownership can offer a suitable structure for investment, including for those planning to pass their investment properties down to their children, but existing landlords also have to consider the costs of restructuring or selling.

“Understanding those choices is essential to assessing how the private rented sector will develop.”

Mortgage interest restrictions

The Budget’s further two percentage point increase, combined with the rise announced last year, takes tax rates on rent income to 24%, 44% and 49% from 2027/28.

Mortgage interest is no longer deducted in full when calculating taxable income, having been replaced with a basic-rate tax credit.

In the same example, tax would account for about 74% of the profit for a higher-rate taxpayer whose income remains below the point at which the personal allowance starts to be withdrawn.

For an additional-rate taxpayer earning more than £130,000, that figure rises to roughly 86%.

Company ownership costs

Profits from properties held through limited companies are subject to corporation tax, so these personal income tax increases do not apply.

Moving an existing property into a company comes at a cost, however, with stamp duty and potentially capital gains tax to consider.

Some landlords may choose to sell a property they own personally, then buy another through a company.

IMLA says a lower income from rent will not necessarily persuade every landlord to sell.

That decision, it adds, will depend on how much they have borrowed, local yields, their expectations for house prices and the cost of selling.

Between November 2022 and August 2026, the number of mortgaged buy to let properties fell by 157,000, according to the report.