What Landlords Need to Know About Income Tax Relief
From 6th April 2017, relief for finance costs on residential property will be cut to the basic rate of tax for individual landlords, under clause 24 of the Finance Bill 2015-16. Rose Jinks, of Landlord News shares her guide for landlords on how the tax change will affect them.
From April, the amount of income tax relief that landlords can claim on residential property finance costs will be gradually restricted, over a four-year period, to the basic rate of tax.
This change will affect you if you let out residential properties as an individual, or in a partnership or trust. The restriction will change how you receive relief for interest and other financial costs.
Under the new rules, finance costs will not be used to work out your taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, your income tax liability will be reduced to the basic rate of tax. This will be the basic rate value of your finance costs.
Who will it affect?
If you are any of the following, you will be affected by clause 24:
- A UK resident individual that rents out residential properties in the UK or overseas
- A non-UK resident individual that rents out residential properties in the UK
- An individual who rents out such properties in a partnership
- A trustee or beneficiary of trusts liable for income tax on property profits
Although all residential landlords with finance costs will be affected, only some will pay more tax.
If you are any of the following, you won’t be affected:
- A UK resident company
- A non-UK resident company
- A landlord of furnished holiday lets
If you operate as any of the above, you will continue to receive relief for interest and other finance costs as usual.
What is included in the restriction?
Interest on the following finance costs will be restricted under clause 24:
- Loans (including loans to buy furnishings)
Other costs that will be affected are:
- Alternative finance returns
- Fees and any other incidental costs for acquiring or repaying mortgages and loans
- Discounts, premiums and disguised interest
Please note: If you take out a loan for both residential and commercial properties, you must calculate a reasonable apportionment of the interest to work out your finance costs for the residential properties, as clause 24 only applies to residential property businesses. This also applies if your loan was taken out partly for a self-employed trade and partly for residential property.
How it will be introduced?
Clause 24 will be phased in gradually from 6th April 2017 and will be fully implemented from 6th April 2020.
From April next year, you will still be able to deduct 75% of your finance costs when calculating your taxable property profits. This will reduce to 50% in 2018, 25% in 2019 and 0% in 2020.
Although clause 24 only applies to finance costs on residential property for individual landlords, it could have other implications for some. For instance, if you or your partner receive child benefit and your income is over £50,000, the high income child benefit charge may apply. Arm yourself with the facts now so you’re aware of the changes before they are introduced in April next year.