It seems like landlords have had a real bashing from the taxman lately. Here’s a quick overview of the recent tax changes to try to simply them and to explain how they might affect you.

Mortgage Interest

The first of the recent changes related to mortgage interest. Until now higher and additional rate tax payers have been able to claim mortgage interest relief at 40% and 45% respectively, however a cap of 20% will be introduced in a phased manner between 2017 and 2020. Landlords will no longer be able to deduct the cost of their mortgage interest from their rental income except for a tax credit equivalent to basic-rate tax on the interest. Here’s an example for a higher rate tax payment;

In 2016 A landlord’s rental property earns £20,000 a year and the interest element of their mortgage is £13,000. Tax is currently due on the profit (ie on £7,000). Of the £7,000 profit, £2,800 is paid in tax and £4,200 is kept by the landlord. In 2020 the same landlord earning £20,000 in rental income will pay 40% tax on the full £20,000 which equates to £8,000 (less a 20% credit on the £13,000 mortgage interest, ie £2,600). Therefore of the £7,000 ‘profit’ outlined above, £5,400 will be due to HMRC while only £1,600 is kept by the landlord; a huge reduction from the money made by the landlord in 2016. Seems harsh!

By taxing turnover, many small landlords will be pulled into a higher tax bracket and others will be forced to pay tax when they have made a trading loss. Many commentators are worried that landlords may be forced into raising rents or selling their investment properties. One option for portfolio landlords may be to move their properties into a limited company structure and pay corporation tax instead.

Wear & Tear allowance

The second recent change announced relates to Wear and Tear allowance on fully furnished properties. From 2017 landlords will no longer be able to apply a straight 10% wear and tear allowance to their rental income. Instead they will only be allowed to deduct the exact amount of costs incurred (ie replacing furniture, furnishings, appliances and kitchenware).

It is argued that this might lead to a fairer system where only real costs can be deducted from income. Furthermore, landlords of unfurnished or part-furnished properties will now be able to deduct the cost of replacing white goods and carpets. However by in large this is likely to lead to a higher tax bill for many landlords of fully furnished properties which were previously not purchasing many new items on an annual basis but were benefiting from the standard 10% wear and tear allowance each year.

Land & Buildings Transaction Tax (LBTT)

In his Autumn statement, George Osborne announced that landlords will have to pay an additional 3% in stamp duty (on top of the stamp already due) and it wasn’t long before John Swinney followed suit, applying the same rules to the Scottish version of Stamp Duty, LBTT, in an attempt to open the door for first-time buyers to enter the Scottish market. From 1st April 2016 a 3% surcharge will be due when an additional property is purchased (above the value of £40,000). John Swinney felt he had to take this move as otherwise investors from other parts of the UK might have flooded the Scottish market and make it even tougher for first-time buyers to enter the market. As a simple example, it means that for a landlord looking to purchase a property investment at £200,000 instead of paying the current rate of £1,500, from April 2016 they will have to pay £7,500. Similarly, where a property purchased at £100,000 this is currently exempt from LBTT, however from April 2016 LBTT due will increase to £3,000.

One concern is that the new LBTT rates on second properties will result in less investment properties being purchased and so less rental properties will be available, forcing rents upwards as demand further outstrips supply. We’re already seeing the effects of these changes as some of our landlords looking to complete on a property investment earlier than planned to avoid a higher LBTT payment, post April 2016.

Capital Gains Tax

Capital Gains Tax on residential property will have to be paid within 30 days of any taxable house sale from April 2019. This may make residential property investments more difficult for some small investors.


While this may all sound a bit ‘doom and gloom’ for landlords, we firmly believe that property investment is still an excellent investment choice and we are confident in our ability to find the best investments for our customers and to manage these properties well and to maximise their yields.  There are several investment ‘hot spots’ in Edinburgh which will inevitably benefit from exciting future large scale developments nearby.

Residential property investment is still an excellent investment choice on its own or as part of a diverse portfolio of investments. House prices in Scotland are expected to grow steadily in 2016 as the market continues to recover from the ‘crash’ of 2007. House prices across Scotland are expected to rise by 3% this year (and to continue to do so over the next 5 years) with popular cities like Edinburgh outstripping this.

Edinburgh features in a list of European cities where investors can capitalise on growing employment, a stable economy and established office markets. It is one of the fastest growing and most productive cities in the UK. It’s highly skilled workforce and competitive costs and an unrivalled quality of life make the city very popular with international investors. Edinburgh is the UK’s most educated city and it has the second highest GVA (gross value added) per resident at £34,178/resident. It’s a leading tourist destination and has a growing population.  Not only does Edinburgh have a booming student population it is a major hub for the Financial Services sector (with major companies such as RBS, Lloyds, Baillie Gifford, Standard Life, Scottish Widows and Aberdeen Asset Management all based here) and the technology industry in the city is growing rapidly.

Many of the recent tax announcements do seem very harsh on landlords, who, on large are not the ‘get rich quick’ types that politicians believe them to be. Most landlords tend to be cautious savers, or individuals who may have inherited a small amount of money or have released money from a pension and would rather have a less volatile investment than the stock market tends to offer. The lettings sector does seem to be an easy target for politicians to claw in some revenue however surely the government should be trying to make the sector more attractive for investment, not the reverse. Perhaps the government’s efforts should be focused on making the landscape for new build properties more attractive to remedy current problems we face relating to lack of first time buyers and rising rents.