From 6th April 2017 the HMRC are restricting the tax relief available for landlords in respect of finance costs on residential properties. HMRC have never allowed tax relief on capital repayments of a mortgage or a loan to purchase a residential property to let, however interest paid on a mortgage or loan to buy a residential property was an allowable deduction for tax purposes.
Unfortunately HMRC are going to phase in the restriction of the tax relief from 6th April 2017 over the course of the next few tax years and so by April 2020 there will no longer be a deduction available for loan interest against rental income. The rates of restriction are as follows:
2017/2018 75% allowable 25% as a tax reducer
2018/2019 50% allowable 50% as a tax reducer
2019/2020 25% allowable 75% as a tax reducer
2020/2021 0% allowable 100% as a tax reducer
The income tax reducer will reduce the individuals total tax liability for the tax year. The income tax reducer will be calculated as 20% of the lowest of:
- The individual’s interest and other relevant finance costs
- The profits of the property letting business
- The individuals “adjusted total income” i.e. his total income less any savings and dividend income and after deducting personal allowance.
Unrelieved amounts can be carried forward to the following tax year.
The restrictions could significantly affect individuals with rental income, even those that are currently basic rate taxpayers. This is because in previous tax years the loan interest relief will have contributed to the calculation determining the basic rate status by reducing the total taxable income of the taxpayer. From April 2020 there will no longer be any allowable deduction which could significantly increase the rental profits and as a result, the taxpayer could find themselves falling into the higher rate tax band. This will obviously mean a higher tax liability with a restricted tax reducer (as per above) to lower the amount due.
The new loan interest restrictions do not effect properties that qualify as a Furnished Holiday Letting, nor do they apply to commercial properties.
If you would like further information please do not hesitate to contact our Tax Manager Jayne Hussey on 01482 427360 or email help@360accountants.co.uk.
