Landlords are no longer be able to deduct all their finance
costs from their property income to arrive at their property profits. They will
instead receive a basic rate reduction from their income tax liability for
their finance costs. The restriction has been phased in gradually from 6 April
2017 and is fully in place from 6 April 2020. From 6 April 2020 landlords will
not be able to deduct any level of mortgage interest before calculating their
tax liability. Tax relief for all finance costs will be restricted to the basic
rate of income tax, currently 20 per cent. Instead, once the Income Tax on
property profits and any other income sources has been assessed, landlords
Income Tax liability will be reduced by a basic rate ‘tax reduction’. The
Government have also reformed how landlords of residential property can account
for the costs they incur in improving and maintaining rental property. The Wear
and Tear Allowance was abolished in 2015/16. Since April 2016, landlords can
claim a ‘Replacement of domestic items’ relief, which is a tax relief on the
costs of replacing a domestic item such as beds, sofas and fridges.
The rules affect UK residents who let residential properties
in the UK or overseas as well as non-UK residents who let residential
properties in the UK. Individuals who let residential properties in a
partnership and/or as a trustee or beneficiary of trusts liable for Income Tax
on the property profits are also affected. However the introduction of the
finance cost restriction will not affect UK resident companies, non-UK resident
companies or a landlord of Furnished Holiday Lettings. Finance costs include:
• mortgage interest
• interest on loans to buy furnishings
• overdrafts
• alternative finance returns
• fees and any other incidental costs for getting or
repaying mortgages and loans
• interest on discounts, premiums and disguised interest If
a loan is taken for both residential and commercial properties, landlords will
need to use a reasonable apportionment of the interest to work out their
finance costs for the residential properties.
As a result of the changes landlords will see an increase in
their rental profit as the finance costs/mortgage interest is no longer
deducted within the rental accounts. Where a landlord remains a basic rate
taxpayer, even with the restriction of finance costs, then they will not see a
difference in the amount of tax payable. If a landlord is a higher or an
additional rate taxpayer or, if the removal of the finance costs within the
landlords’ rental accounts means they will fall into the higher rate or additional
rate tax bans, they will have a greater tax liability.
Landlords looking for further advice can contact Paul Barnes
in the first instance who can put you in touch with qualified accountants who
can offer professional advice. Each landlord will have very different
circumstances.