The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income Tax.  This is to be phased in from April 2017.

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

Historically finance costs were taken into account in working out the taxable profits from a property rental business and relief at 100% was given.

With effect from April 2017 the method of relief is changing.  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’.

Who does this affect?

  • UK resident individuals that let residential properties in the UK or overseas
  • Non-UK resident individuals that let residential properties in the UK
  • Individuals who let properties in a partnership
  • Trustees or beneficiaries of trusts liable to income tax on rental income

Those not affected are:

  • UK resident companies
  • Non-UK resident companies
  • Landlords of furnished holiday lettings

The finance costs that are restricted include interest on mortgages, loans and overdrafts.

The restriction will be phased in gradually form 6 April 2017 and will be fully in place by 6 April 2020.  This four year phasing in period means that during these years part of the finance costs are claimed as a deduction against profits and part is claimed as a basic rate tax reduction.  The rates are as follows:

 

Tax Year % of finance costs
deductible from rental income
% of basic rate
tax reduction
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21 0% 100%

The changes mean that the way taxable income is calculated has altered and for some people there will be other implications.  For example, individuals that received Child Benefit and income is over the £50,000.  The High Income Child Benefit Charge may apply.

Further guidance relating to these changes can be found on the Gov.UK website.