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’.
| 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
- 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.