Clarification to finance costs restriction for landlords
Updated 6 February 2017
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This publication is available at https://www.gov.uk/government/publications/clarification-to-finance-costs-restriction-for-landlords/clarification-to-finance-costs-restriction-for-landlords
Who is likely to be affected
Individuals, partners and trustees to whom the finance costs restriction applies. Beneficiaries of deceased persons’ estates where the residential property finance costs of personal representatives have been restricted.
General description of the measure
This measure will clarify that the basic rate tax reduction is available to beneficiaries of deceased persons’ estates. It also ensures that the basic rate tax reduction applies and is calculated as intended.
Policy objective
This measure will ensure that the legislation restricting finance costs relief operates as intended.
Background to the measure
This measure was announced at Budget 2016.
Detailed proposal
Operative date
This measure will have effect for finance costs incurred on or after 6 April 2017.
Current law
Current law restricting landlords’ finance costs deductions is in sections 272A and 272B Income Tax (Trading and Other Income) Act 2005. The law that gives entitlement to the basic rate tax reduction is in sections 274A and 274B Income Tax (Trading and Other Income) Act 2005 and section 399B Income Tax Act 2007 for individuals investing in partnerships that operate residential property businesses.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 in order to:
- put beyond doubt that individual beneficiaries of deceased persons’ estates are entitled to the basic rate tax reduction
- ensure that the total income restriction to the tax reduction applies where the relevant finance costs or property profits are higher than the total income
- ensure that total income is a measure of the net taxable income after other reliefs
- ensure that any carried forward tax reduction is given in any subsequent year in which property income is received, even if there is no restriction on the deduction of finance costs in that year, for example, where the loan has been repaid
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
This measure clarifies that the basic rate tax reduction is available to beneficiaries of deceased persons’ estates. It also ensures that the basic rate tax reduction applies and is calculated as intended. The Exchequer impact of ‘Residential property: restrict finance relief to basic rate, phase from 2017’ is set out in Table 2.1 of Summer Budget 2015 and was certified by the Office for Budget Responsibility.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure is a clarification and is designed to ensure the legislation implements the policy as announced.
The measure is not expected to impact on individuals, households or family formation, stability or breakdown.
Equalities impacts
This measure should have no adverse impact on the equality of protected groups.
Impact on business including civil society organisations
Details of the administrative costs and benefits are set out in the ‘Restricting finance cost relief for individual landlords’ tax information and impact note published as part of the Overview of Tax Legislation and Rates on 8 July 2015.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be no significant operational impact. No amendments are needed to self-assessment returns and the only impact for HMRC is to ensure that guidance is updated to make it clear how the provisions work in practice.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns