The tax relief landlords of residential properties get for finance costs will be restricted to the basic rate of income tax. This is to be phased in from April 2017.
The changes will:
• Affect you if you let residential properties as an individual, or in a partnership or trust.
• Alter how you receive relief for interest and other finance costs.
• Be gradually introduced over four years from April 2017.
Historically, finance costs were taken into account in working out the taxable profits from a property rental business and relief at 100 per cent was given. With effect from April 2017, the method of relief is changing. 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.
Who does this affect?
• UK resident individuals that let residential properties in the UK or overseas.
• Non-UK resident individuals that let residential properties in the UK.
• Individuals who let properties in a partnership.
• Trustees or beneficiaries of trusts liable to income tax on rental income.
Those that are not affected are:
• UK resident companies.
• Non-UK resident companies.
• Landlords of furnished holiday lettings.
The finance costs restricted include interest on mortgages, loans and overdrafts. The restriction will be phased in gradually form 6 April 2017, and be fully in place by 6 April 2020. This four-year phasing-in period means that during these years part of the finance costs are claimed as a deduction against profits, and part is claimed as a basic rate tax reduction.
Tax year Percentage of finance costs Percentage of basic rate
deductible from rental income tax reduction
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21 0% 100%
The changes mean the way taxable income is calculated has altered, and for some people there will be other implications. For example, for individuals who receive child benefit and income that is over the £50,000 threshold, the High Income Child Benefit Charge may apply.
Further guidance relating to these changes can be found on the government website: www.gov.uk.
Ben Chaplin is managing director of Taxwise