Buy-to-let landlords affected by changes to tax relief

HM Revenue and Customs (HMRC) has published fresh guidance to residential landlords regarding changes to tax relief, restricting relief for finance costs to the basic rate of income tax.

The changes, which will come into effect from April 2017, will be phased in over a four-year period. Throughout the transitional phase, landlords will still be in a position to deduce some finance costs when determining taxable property profits.

Once the income tax on property profits and any other income sources has been assessed, a landlord’s income tax liability will be reduced by a basic rate ‘tax reduction’.

The new rules are applicable to UK residents that let residential property across both the UK and overseas; as well as non-UK residents that let residential property in the UK, individuals who let properties in partnership and trustees or beneficiaries of trusts liable for income tax on property profits.

Those not affected by the tax relief changes include landlords of furnished holiday lettings, UK-based companies and non-UK based companies.

Finance costs relating to residential landlords will be restricted to just interest on mortgages, loans – such as loans to purchase furnishings – overdrafts, alternative finance returns, fees and additional incidental costs for securing or repaying mortgages and loans and discounts, premiums and disguised interest.

HMRC states that landlords can still deduct 75 per cent of finance costs from rental income in 2017-18, using a 25 per cent basic rate tax deduction. This is then phased down in 2018-19 to 50 per cent finance costs deduction and 50 per cent basic rate tax reduction, followed by 25 per cent finance costs deduction and 75 per cent basic rate tax reduction, followed by 100 per cent basic rate tax reduction by 2020-21.

In addition, these changes may have other tax implications for certain landlords, such as those who receive child benefit.
For a comprehensive round-up of HMRC’s changes to tax relief for residential landlords check out the GOV.UK guidance page here.

Last updated: 21st July 2016