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Tax on Residential Rental Income - Comment

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Tax on Mortgage Interest – following s.24 of George Osbourne’s 2015 Finance Act, Landlords are less and less able to offset mortgage interest on let residential property against rental income. By 2020/2021, no interest will be offset at all. This results in finance interest being taxed as turnover and profit. If interest rates rise, this could result in the tax bill being greater than profit, resulting on losses from letting property.


A report published this month by the Institute of Economic Affairs is highly critical of the income tax and Stamp Duty weighted approach to the Private Rented Sector (PRS). It accuses the Treasury of appearing not to understand the basic principles of taxation and calls for reform of the basis of taxation of the PRS. One suggestion that it makes is to replace Council Tax and Stamp Duty with a tax on owner-occupiers on imputed rent, last seen in the 1960s. This would result in owner-occupiers paying tax on imputed rent and landlords paying tax on actual rent and it claims that this would “level the playing field”. It says nothing about what tenants would pay and since tenants pay Council Tax at present, it seems to suggest a saving for tenants.


Without changes, the report foresees that the PRS will contract and rents will rise, to the detriment of tenants. These forecasts are already being seen in the results of the monthly property surveys conducted by the Royal Institution of Chartered Surveyors. Landlords with little or no mortgage funding will not be affected but are likley to benefit from general rises in market rents. The outlook for tenants is not encouraging.