The amount of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of 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 gradually introduced 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.
Who’ll be affected
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
All residential landlords with finance costs will be affected, but only some will pay more tax.
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
You’ll continue to receive relief for interest and other finance costs in the usual way.
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. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.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:
||Percentage of finance costs deductible from rental income
||Percentage of basic rate tax reduction
|2017 to 2018
|2018 to 2019
|2019 to 2020
|2020 to 2021
Other implications of the restriction
These reforms mean that the way taxable income is calculated will change and that may have other implications for some. For example, if you or your partner receive Child Benefit and your income is over £50,000 the High Income Child Benefit Charge may apply.
These rules were announced at the Summer Budget 2015 and are contained in Finance (No. 2) Act 2015 as amended by Finance Bill 2016.
Changes to tax relief for residential landlords: how it’s worked out, including case studies
Work out the tax relief for individual landlords and assess the impact of the finance cost restriction.
Deductible expenses for individual landlords
Guidance about your tax obligations and how to work out your rental income if you rent out properties in the UK.
Reform of the wear and tear allowance
Guidance about the relief allowing landlords of residential dwelling houses to deduct costs for replacing furnishings, appliances and kitchenware in the property.