The Government intends to restrict the amount of income tax relief landlords can get on residential property mortgage costs to the basic rate of income tax.
Property businesses with large borrowings will find that their business model has been seriously harmed by these changes.
As well as restricting mortgage costs, the Government also plans to restrict other finance costs such as fees incurred when taking out or repaying mortgages or loans. As has always been the case, no relief is available for capital repayments of a mortgage.
How these changes will be introduced
The way the changes are being introduced is complicated and will be phased in over several years.
Instead of being able to deduct all of their finance costs, landlords will receive a basic rate reduction from their income tax liability.
The Government will introduce this change gradually from April 2017, over four years. The restriction in the relief will be phased in as follows:
- 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction
- 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction
- 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
This restriction will not apply to landlords of furnished holiday lettings.
This can be illustrated by looking at the impact on a 40% taxpayer who owns a single buy-to-let:
|Gross rents received||£8,000||£8,000|
|Less: Repairs and other allowable expenses||£1,300||£1,300|
|Less: Interest paid on mortgage||£2,700||£ -|
|Net rental profit||£4,000||£6,700|
|Income tax @ 40%||£1,600||£2,680|
|Less: Interest relief (20% x 2,700)||£ -||£540|
|Net income tax liability||£1,600||£2,140|
|Buy to let profit||£2,400||£1,860|
In the above example, the reduction in profit of £540 is due to the 40% taxpayer no longer being able to benefit from a full write off of loan interest and only being able to claim a 20% tax credit.
How TaxAssist Accountants can help
We can help you determine the impact on your property business. In certain cases, it may be that tax planning can be considered to reduce the impact of some of the changes. For more information, please contact us online here or call our team on 0800 0523 555.
By Andy Gibbs, ATT, CTA
Last updated February 2017