If you are a private landlord, the amount of relief you can receive on property finance costs will be restricted from April 2017.
Private landlords of residential properties may currently claim income tax relief on the total cost of finance, such as mortgage and loan interest, but new restrictions come into force next year.
Relief on costs will in future be restricted to the basic rate of tax, currently 20 per cent. The restriction will be phased over four years, with basic rate tax relief applying to 100 per cent of finance costs by 2020/21, following three annual 25 per cent increments between 2017 and 2019/20.
Tax reductions will be calculated as a proportion of the lowest of a landlord’s finance costs, total income and property profit. The reduction will equate to debt costs multiplied by the income tax basic rate.
Few basic rate taxpayers are likely to be hit, but higher earning landlords may lose 20 per cent of their costs relief, as the following example shows:
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Applicable rates and reliefs Basic rate income threshold is £32,000; higher rate threshold is £43,000; personal allowance is £11,000. Taxable rental income allowance is £15,000. Scenario A – current rules A landlord earns £28,000 and receives £23,000 rental income before mortgage interest costs of £8,000. Total income is £43,000 – basic rate tax applies. Scenario B – new rules Total income is £51,000. The rental income is not cost-adjusted, so the 40 per cent higher rate applies to the £8,000 above the threshold. Tax is £3,200. Relief is calculated at basic tax rate on the full income tax liability: £8,000 at 20 per cent gives relief of £1,600. Additional landlord tax liability is £1,600. |
Landlords also need to consider that:
- Tax reductions will not generate a tax refund, although unrelieved interest may be carried forward.
- An individual’s personal allowance is reduced when income exceeds £100,000 a year.
- Child benefit will be recovered if ‘adjusted net income’ is above £50,000. Interest will not be deductible when ‘adjusted net income’ is calculated.
The new relief restriction rules do not apply to residential property companies and furnished holiday lettings.
If you are a private landlords or an investor, we can provide advice on all issues that affect your property letting arrangements and finances.
We can also manage your HMRC submissions.
Please contact us for more details.
