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5 Apr 2020

The key tax changes for buy-to-let landlords in 2020-21

Mortgage interest and capital gains tax reforms top the bill

Landlords face more taxation changes in the new tax year, with the phasing out of mortgage interest tax relief reaching its final stage and capital gains tax undergoing a series of tweaks.

The new rules coming into force at the start of the new tax year have been on their way for some time, but they could have a significant effect on the tax burdens facing property investors.

Here, Which? explains the changes landlords need to be aware of as we enter the 2020-21 tax year.

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Mortgage interest tax relief changes

From 2020-21, landlords will only be able to offset 20% of their mortgage interest payments when filing their tax returns.

The change marks the final chapter in the government's tapering off of mortgage interest tax relief, a process that's been underway since 2017.

The policy has been very unpopular with landlords since its inception, and many investors have cited significantly higher tax bills as a primary reason to reduce their portfolios or sell up entirely.

You can find out more about how the changes could affect you in our full guide on mortgage interest tax relief.

Capital gains tax

The 2020-21 tax year also brings a significant change to how capital gains tax (CGT) is paid.

You'll usually need to pay CGT if you make a profit when selling an investment property, but how much you'll pay depends on the size of the profit and your financial circumstances.

Until now, landlords have been able to declare any CGT liabilities in their next annual tax return, potentially giving them well over a year to pay the bill.

Now, however, landlords must declare and pay any CGT liabilities using the government's new online service within 30 days of selling the property.

You can learn more about CGT rates and calculations in our full guide on capital gains tax on property.

Reduction of capital gains tax relief

The government is also tweaking the rules around private residence relief and letting relief on CGT bills.

These two deductibles are only available to landlords who once lived in the investment property themselves, so they won't apply to a large proportion of buy-to-let landlords.

Private residence relief

If you once lived in your investment property, you wouldn't need to pay CGT for the years you lived there when you come to sell.

Under the current rules, you'll also be exempt from CGT for the final 18 months you owned the property, even if you didn't live there yourself.

But from the 2020-21 tax year, the 18 month period will be cut to nine months.

Letting relief

Landlords could also benefit from CGT relief of up to £40,000 when selling an investment property that was once their home - even if they hadn't lived in it for many years.

Under the new rules, however, investors will need to live in the property themselves when they come to sell it.

This change effectively removes letting relief as a deductible for the vast majority of landlords when filing their CGT returns.

When do I need to file my tax return?

The changes we've described above come into force for the 2020-21 tax year, for which the self-assessment tax return deadline is 31 January 2022.

The next tax return you'll file will be for the 2019-20 tax year. The deadline for paper returns is 31 October 2020 and for online returns, it's 31 January 2021.

Can I deduct expenses when filing my return?

While some of these changes could increase your tax burden, it's not all doom and gloom.

There are still plenty of costs you can offset when filing your return, such as estate agent fees, maintenance costs, service fees and landlord insurance.

You can find out more about deductibles in our full guide on allowable expenses for landlords.

Help for landlords during the coronavirus outbreak

It's a tricky time to be a landlord, and the outbreak of coronavirus has brought about new challenges.

Landlords whose tenants face financial hardship can apply for a three-month mortgage payment holiday. The government says this break should be passed on to tenants in the form of rent deferrals, and that both parties should then work together to arrange a repayment plan for any arrears.

If you were thinking of growing or cutting down your portfolio this year, this too will have been affected by the outbreak.

But with the property market essentially on hold, now could be a good time to assess your options and consider your long-term strategy.