Changes to tax relief for residential landlords
Further details of the implementation of Section 24 of the Landlord and Tenant Act have been released by the Government, advising the change will be phased in from April 2017. From this time, the tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income 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 introduced gradually 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.
All residential landlords with finance costs will be affected, however only some will end up paying more tax. For full details on how the Government works this out please visit:
Who will this new legislation effect?
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
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
The way in which you receive relief for finance costs and interest will continue in the say process and is not affected by the new legislation.
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; more information on this can be found at https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies
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: