Regulation 

Mortgage interest relief change surprise

Mortgage interest relief change surprise

Currently landlords renting residential property can claim relief for mortgage interest (not the repayment of capital) against their rental income, unlike home owners.

The new measures will be introduced gradually from 6 April 2017 but will not affect properties that qualify as furnished holiday lettings. Relief for finance costs will be restricted to the basic rate of income tax.

Finance costs will include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. The gradual introduction of the restriction will be as follows:

2017 to 2018 - the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25 per cent being available as a basic rate tax reduction.

2018 to 2019 - 50 per cent finance costs deduction and 50 per cent basic rate tax reduction.

2019 to 2020 - 25 per cent finance costs deduction and 75 per cent basic rate tax reduction.

From 2020 to 2021 all financing costs incurred will be given as a basic rate tax reduction.

The chancellor’s objective for this change is to ensure that landlords with higher incomes no longer receive the highest tax deduction against rental income.

The other announcement in relation to landlords was the increase to the rent-a-room limit, which will apply from 6 April 2016. Currently an individual who qualifies for the rent-a-room relief can receive income of up to £4,250 without it being charged to income tax.

This will be increased to £7,500 which will reduce and simplify the tax/administrative burden for those with rent-a-room incomes greater than the previous level.

Rajiv Vadgama, tax director, Baker Tilly Tax and Accounting Limited