Landlords will face restrictions on the amount of income tax relief they can receive on the costs of financing residential property from April 2017. Landlords will no longer be able to claim higher rate income tax relief and (once the changes are in full force) will be limited to the 20% basic rate of tax.
The basic rate value of residential property finance costs will be deducted from your total income tax liability. This will mean that finance costs will not be deductible from your rental income when calculating the taxable profits earned from residential property.
Which finance costs are included in the restrictions?
The changes will mean that you will no longer be able to claim higher rate tax relief on any of the following property expenses:
- mortgages
- loans
- overdrafts
- alternative finances returns
- mortgage and loan fees
- discounts, premiums and disguised interest.
Will I be affected?
The changes will apply to all individuals who operate residential property businesses. This includes the following:
- UK residents who let property either in the UK or in another country
- non-UK residents who let property in the UK
- landlords who let properties as part of a partnership
- trustees and trust beneficiaries who pay income tax on profits derived from letting residential property.
Individuals who earn income from trading land and property, as well as those involved in commercial and furnished holiday lets, will be unaffected. The changes will also not affect the tax situation of limited companies.
How will the restrictions be introduced?
The changes will be gradually introduced between the 2017/18 and 2020/21 tax years. The percentage of your finance costs you can offset against your rental income will gradually reduce over the next 4 tax years while the proportion of finance costs treated for basic rate reduction will increase.
| Tax year | Percentage of finance costs deductible from rental income | Percentage of costs eligible for basic rate reduction |
| 2017/18 | 75% | 25% |
| 2018/19 | 50% | 50% |
| 2019/20 | 25% | 75% |
| 2020/21 | 0% | 100% |
Contact us
Both basic rate and higher rate taxpayers may be affected by the changes. Landlords paying the higher rate of tax will lose access to their 40% tax relief. The inability to offset rental income with finance costs will increase landlords’ total taxable income, potentially pushing basic rate taxpayers into the higher rate tax bracket.
Want to know more about how the restrictions will affect your tax position?
Contact us on 0161 477 6789 for further information about our services for landlords and flat management companies.
© 2019 Warr & Co Chartered Accountants. Warr & Co Chartered Accountants is a member of The Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact any one of the partners on 0161 477 6789 or contact us via our website forms. Warr & Co Chartered Accountants are registered to carry our audit work in the UK, our audit registration number is C002961684, for more information please visit www.auditregister.org.uk.