Interest rate rises, coupled with restricted tax relief for borrowing costs, are brewing a storm that could even turn a tax cut into bad news for landlords.

Since 6 April 2017, tax relief on finance costs has been restricted for most unincorporated landlords of residential property. The restriction means that most landlords can, at best, only claim basic rate income tax relief – equal to 20% of their finance costs – rather than a full deduction from taxable profits which may initially be taxable at the higher rate or additional rates of tax.

The result of the restriction is that taxpayers may suffer an effective 20% or 25% tax charge on notional profits, even if their business made a loss after finance costs. Scottish taxpayers may pay an even higher charge due to the higher tax rates in Scotland.