From April 2017, the tax relief which landlords can claim for finance costs (most commonly mortgage interest) is set to change. From April 2017, to be phased in over 4 years, the relief will be restricted to the basic rate of tax only. This will directly impact higher rate tax payers with property income, where the property is subject to a mortgage or other finance costs. Because the new tax relief is given by way of a basic rate tax credit, rather than an expense deduction, this may also have the effect of moving basic rate tax payers into the higher rate tax brackets. Each case needs to be looked at on an individual basis, and I would be happy to advise ‘buy to let’ landlords on the new changes and the implications for them.
The following notes on the changes are taken from HMRC’s own website:
‘The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income Tax, this will be phased in from April 2017.
The amount of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax.
The changes will:
- affect you if you let residential properties as an individual, or in a partnership or trust
- change how you receive relief for interest and other finance costs
- be gradually introduced over 4 years from April 2017
Finance costs won’t be taken into account to work out taxable property profits. Instead, once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.
Who’ll be affected
You’ll be affected if you’re a:
- UK resident individual that lets residential properties in the UK or overseas
- non-UK resident individual that lets residential properties in the UK
- individual who let such properties in partnership
- trustee or beneficiary of trusts liable for Income Tax on the property profits
All residential landlords with finance costs will be affected.
You won’t be affected by the introduction of the finance cost restriction if you’re a:
- UK resident company
- non-UK resident companies
- landlord of Furnished Holiday Lettings
You’ll continue to receive relief for interest and other finance costs in the usual way.
What’s included under the finance cost restriction
The finance costs that will be restricted include interest on:
- loans – including loans to buy furnishings
Other costs affected are:
- alternative finance returns
- fees and any other incidental costs for getting or repaying mortgages and loans
- discounts, premiums and disguised interest
If you take a loan for both residential and commercial properties, you’ll need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties. Only the finance costs for the residential property business are restricted. This also applies if your loan was partly for a self-employed trade and partly for residential property.
Phasing in the restriction
The restriction will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.
You’ll still be able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.
You’ll be able to use some of your finance costs to work out your property profits and use your remaining finance costs to work out your basic rate tax deduction:
|Tax year||Percentage of finance costs deductible from rental income||Percentage of basic rate tax reduction|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
Other implications of the restriction
These reforms mean that the way taxable income is calculated will change and that may have other implications for some. For example, if you or your partner receive Child Benefit and your income is over £50,000 the High Income Child Benefit Charge may apply.
These rules were announced at the Summer Budget 2015 and are contained in the Finance Bill 2016.’