Finance

Buy to Let Property Owners

By December 9, 2016 No Comments

Changes to UK Tax Relief on Finance Costs

At present, landlords can deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

From 6th April 2017, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.

The changes will be phased in as follows:

2017/18 – Allowable deduction restricted to 75% of finance costs – basic rate deduction on the remaining 25%

2018/19 – Allowable deduction restricted to 50% of finance costs – basic rate deduction on the remaining 50%

2019/20 – Deduction restricted to 25% of finance costs – basic rate deduction on the remaining 75%

2020/21 – No deduction for finance costs – basic rate deduction on finance costs incurred

Key changes in summary:

  • The changes are effective from the 2017/18 financial year and will be phased in over four years
  • Mortgage interest tax relief will be limited to the basic rate of tax, currently 20%, and given as a reduction in tax liability instead of a reduction to taxable rental income
  • The changes mean that the basic rate taxpayers could find themselves pushed into a higher rate band as a result
  • There’s no impact on tax liability for landlords who remain as zero or basic rate payers, after calculating taxable income under the new rules
  • Other allowable costs, on an actual cost basis, can still be deducted from gross rental income for the purposes of determining taxable income

Potential impacts:

  • Higher rate and additional rate taxpayers will pay more in tax, as tax relief on mortgage interest will be limited to the equivalent level of a basic rate tax payer (currently 20%)
  • With taxable income now being calculated without a deduction for finance costs, some landlords may experience an upward movement in tax bands
  • It could be possible that some landlords currently making a small net profit will experience negative cash flow after tax

Who will be most impacted:

  • Existing higher rate taxpayers (40% and 45%)
  • Landlords with marginal rental cover (high mortgage costs relative to rental income)
  • Tax payers moving into a higher rate tax band as a result of the changes
  • Landlords with strong rental cover

No information above should be taken as tax advice. For advice you should consult with an independent tax adviser.