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

Seven years ago, the then Chancellor announced a revised 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% tax credit for interest paid. This reduced the tax relief received by higher and additional rate taxpayers to basic rate. To limit the immediate effect of the change, the new system was phased in over four years, starting in April 2017.

In 2022, as interest rates have risen, the impact of these changes has been dramatic, compounded by sharply rising net interest costs, whose speed is not matched by increasing rents.

Energy ratings shift

Higher 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, with regulations originally expected this autumn. 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.

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 and factor them into future planning.

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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