Changes to buy-to-let finance costs relief
New restrictions for property landlords start 6th April 2017
Do you let out property?
If so you should already be aware that in just a few weeks time, from 6 April 2017, higher rate tax relief will gradually be restricted for buy-to-let landlords on the ‘costs of finance’, such as mortgage interest. 'Restricting finance cost relief for individual landlords' was a measure introduced by the Chancellor in the Summer Budget 2015.
What does this mean?
The new measure restricts relief for finance costs on residential properties to the basic rate of Income Tax and will be introduced gradually from 6 April 2017. The change is being phased in over three years. In the 2017-18 tax year, only 75% of the 'costs of finance' will be able to be offset; this will fall to 50% in 2018-19, 25% in 2019-20, and then 0% from 2020-21.
It means that property landlords will no longer be able to deduct all the finance costs from their property income to arrive at their property profits. Instead, individual property landlords are required to make a tax return adjustment. The adjustment will give you a basic rate tax deduction after the rental profits have been taxed. This deduction will be up to 20% of the finance cost.
Unfortunately, this measure will impact on all taxpayers who incur finance costs who report rental business, under Self Assessment and not just higher rate taxpayers.
What are 'finance costs'?
Finance costs include mortgage interest, any payments that are equivalent to interest, and incidental costs of obtaining finance, such as fees and commissions, legal expenses for negotiating drafting loan agreements or valuation fees required to provide security for a loan.
Example of change to tax liability
A landlord with £60,000 of gross rental income, £6,000 of agent’s commission, £8,000 of repairs and other expenses and £40,000 of interest would currently have £6,000 of net rental profits.
However, from 2017-18 the interest relief will start being restricted, and from 2020-21 there will be no interest deduction, which would mean that, assuming the rent and expenses remain the same, the taxable rental income would be £46,000.
For many landlords this will mean that the rent will fall into the higher rate tax bands and the £40,000 interest will result in a £8,000 basic rate tax reducer to set against the tax liability.
Can anything be done?
If you would like any assistance in ensuring you are claiming all allowable expenses or have any concerns on this matter, get in touch with New Forest Tax Accountants who have been providing accountancy services for property landlords for over 25 years.