BookkeepingSelf Assessment Tax

Changes to Tax Relief for Residential Landlords

Changes to Tax Relief for Residential Landlords

From April 2017 HMRC are phasing in a commitment to restrict the tax relief landlords get for finance costs to the basic rate of income tax. This will be phased in over four years.

 

Who does it affect?

  • UK resident landlords letting residential properties in the UK or overseas
  • Non-UK resident landlords letting residential properties in the UK
  • Individuals who let the above properties in partnership
  • Trustees or beneficiaries of trusts liable for income tax on property profits

You won’t be affected if

  • You have a company that lets residential properties
  • You’re a landlord of Furnished Holiday Lettings only
  • You rent out commercial properties only

Just because you’re affected it doesn’t mean you’ll pay more tax! Read on for more information.

What’s changed?

Finance costs (including interest on mortgages, loans and overdrafts) will no longer by deducted as an expense when working out your taxable property profits. Instead, your property profits will be added to other income sources, the income tax owing will be assessed and then the Income Tax Liability will be reduced by the basic rate ‘tax reduction’.

Phasing in the restriction
Tax Year % finance costs deductible % basic rate reduction
2017-18 75% 25%
2018-19 50% 50%
2019-20 25% 75%
2020-21 0% 100%

So how does this work in practice?

The reduction is the basic rate value of the lower of

  • Finance costs (or the proportion of in the transitional years) plus any finance costs brought forward*
  • Property business profits in the tax year after using any brought forward losses
  • Income (excluding savings and dividend income) that exceeds the personal allowance (adjusted total income)

*If the finance costs figure isn’t used then the difference between the figure used and the finance costs can be carried forward.

NB You can’t use the tax reduction to create a tax refund

Examples for individual landlords with only residential property income

  1. In this example there is no change to the income tax after the restriction has been fully implemented (2020-21)

A residential landlord has rental income of £52,000, finance costs of £20,000 and other allowable expenses of £9,000

Before restriction (2016 – 17)   After restriction (2020 – 21)
Rental income 52,000     Rental income 52,000  
Finance costs -20,000     Finance costs Nil  
Other expenses 9,000     Other expenses -9,000  
Property profits   23,000   Property profits   43,000
Total income   23,000   Total income   43,000
             
Income tax calculation (using 2016/17 allowances   Income tax calculation (using 2016/17 allowances
£11,000 x 0%   0   £11,000 x 0%   0
£23,000-£11,000 x 20% 2,400   £43,000-£11,000 x 20% 6,400
£0 x 40%   0   £0 x 40%   0
    _____   Less 20% tax reduction (20% of £20,000)** 4,000
Final income tax   2,400   Final income tax   2,400
             
        ** tax reduction – 20% of the lower of
        Finance costs 20,000
        Property profits 43,000
        Adjusted total income (43,000 – 11,000) 32,000

2. In this example there is a change to the income tax after the restriction has been fully implemented (2020-21)

The same residential landlord also has self-employed income of £10,000

Self employed income 10,000   Self employed income 10,000
     
Before restriction (2016 – 17)   After restriction (2020 – 21)
Rental income 52,000     Rental income 52,000  
Finance costs -20,000     Finance costs Nil  
Other expenses 9,000     Other expenses -9,000  
Property profits   23,000   Property profits   43,000
Total income   33,000   Total income   53,000
             
Income tax calculation (using 2016/17 allowances   Income tax calculation (using 2016/17 allowances
£11,000 x 0%   0   £11,000 x 0%   0
£33,000-£11,000 x 20% 4,400   £32,000 x 20% 6,400
£0 x 40%   0   £53,000-£43,000 x 40% 4,000
    _____   Less 20% tax reduction (20% of £20,000)*** 4,000
Final income tax   4,400   Final income tax   6,400
             
        *** tax reduction – 20% of the lower of
        Finance costs 20,000
        Property profits 43,000
        Adjusted total income (53,000 – 11,000) 42,000
               

3. Use the following method to work out the income tax during phasing in

The same landlord as example 2 in 2017-18 – 75% finance costs allowed

Self employed income 10,000
 
Rental income 52,000  
Finance costs (£20,000 x 75%) -15,000  
Other expenses -9,000  
Property profits   28,000
Total income   38,000
     
Income tax calculation (using 2016/17 allowances)
£11,000 x 0%   0
£38,000 – £11,000 x 20% 5,400
£0 x 40% 0
Less 20% tax reduction (20% of £5,000)**** 1,000
Final income tax   4,400
     
**** tax reduction – 20% of the lower of
Finance costs (25% x £20,000) 5,000
Property profits 28,000
Adjusted total income (38,000 – 11,000) 27,000

If you would like any advice about how these changes affect you, or require help completing your self assessment tax return, please contact me for a free, no obligation consultation.