Gerry MacCrossan
From 6 April 2017 onwards, legislation has been introduced to gradually restrict the deduction of finance costs for individuals, partnerships and trusts who receive rental income from residential property in the UK. This is most concerning for highly geared property businesses. The amount of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax.
Who is affected?
- UK resident individuals who let residential properties in the UK or overseas;
- Non-UK resident individuals who let residential properties in the UK;
- Individuals who let properties in partnership; and
- Trustee/beneficiary of trusts which are liable to Income Tax on property profits
If you are a UK or Non-UK resident company or are a landlord of Furnished Holiday Lettings you will not be affected by this restriction and will continue to obtain tax relief for interest and finance costs in the normal way.
Finance costs include mortgage interest, overdraft interest, interest on loans to buy furnishings and fees incurred to take out or repay mortgages/loans. Currently, landlords are able to deduct all of the finance costs incurred from the property income. The new rules will result in you receiving a basic rate reduction from your income tax liability for finance costs incurred. The relief will be obtained as followed:
| Deduction from Property Income | Basic Rate Tax Reduction | |
| 2017/18 | 75% | 25% |
| 2018/19 | 50% | 50% |
| 2019/20 | 25% | 75% |
| 2020/21 | 0% | 100% |
The basic rate tax reduction will involve you claiming a basic rate tax deduction on the portion of finance costs not deducted from property income. This tax reduction will be calculated at 20% of the lower of:
- Finance costs not deducted from income in the tax year; or
- Property business profits in the tax year; or
- Total income (excluding savings income and dividend income) that exceeds the personal allowance in the tax year.
These changes also impact on the way taxable income is calculated and may have other implications for taxpayers. For example, if you or your partner receive child benefit income and either of your income is over £50,000 the child benefit tax charge will apply.
If you are affected by this, contact us now for help and advice.