HMRC has issued guidance concerning changes to tax relief for residential landlords, restricting relief for finance costs to the basic rate of income tax which will be phased in over four years starting from April 2017
Under the new rules, finance costs will no longer 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, a landlord’s income tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this will be the basic rate value of the finance costs, HMRC says.
The rules apply to UK resident individual that lets residential (but not commercial) properties in the UK or overseas; a non-UK resident individual that lets residential properties in the UK; an individual who let such properties in partnership; and the trustee or beneficiary of trusts liable for income tax on the property profits.
Landlords of furnished holiday lettings, UK resident companies, and non-UK resident companies are not affected by the changes.
The finance costs that will be restricted include interest on mortgages, loans (including loans to buy furnishings) and overdrafts.
Other costs affected are alternative finance returns, the fees and any other incidental costs for getting or repaying mortgages and loans, and discounts, premiums and disguised interest.
Landlords who take a loan for both residential and commercial properties, will need to use a reasonable apportionment of the interest to work out the finance costs for the residential properties. This also applies if the loan was partly for a self-employed trade and partly for residential property.
The restriction will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020. During the transitional period, landlords will still be able to deduct some finance costs when working out taxable property profits.
According to a table supplied by HMRC, landlords will be able to deduct 75% of finance costs from rental income in 2017/18 and use a 25% basic rate tax reduction. This becomes 50% finance costs deduction and 50% of basic rate tax reduction in 2018/19, then 25%/75% before reaching 0% deduction of finance costs and 100% basic rate tax reduction in 2020/21.
HMRC cautions that these changes may have other implications for some landlords, for example if they or their partner receive child benefit.
HMRC guidance on Changes to tax relief for residential landlords is here.
HMRC guidance Changes to tax relief for residential landlords: how it's worked out, including case studies is here.
