New Tax Rules For Landlords

New Tax Rules For Landlords

New rules start to take effect from 6 April 2017 which restrict the amount of tax relief that landlords can claim in respect of interest and other finance costs.

Tax relief for interest

New rules start to take effect from 6 April 2017 which restrict the amount of tax relief that landlords can claim in respect of interest and other finance costs. For 2016/17 and earlier tax years the rules are simple – you just deduct any mortgage interest and any finance costs from your rental income when working out your taxable profit. However, the way in which relief is given for interest and finance costs is moving from the current system where you just deduct it from income to one where relief is given as a ‘basic rate tax reduction’. This means that instead of deducting interest costs from rental income, you deduct 20% of the interest and finance costs for the tax year from the tax that you have to pay on your rental profits for that year.

Phasing in the changes

The new rules are being phased in over a four-year period. During the transition period, you will get relief for some of your interest costs as a deduction against your rental income and the balance as an income tax reduction. During the period from 2017/18 to 2020/21, you will be able to obtain relief as follows:

  • In 2017/18, you will be able to deduct 75% of your interest and other finance costs from your rental income with relief for the remaining 25% being given as a basic rate tax reduction.
  • In 2018/19 you will be able to deduct 50% of your interest and other finance costs from your rental income with relief for the remaining 50% being given as a basic rate tax reduction.
  • In 2019/20 you will be able to deduct 25% of your interest and other finance costs from your rental income with relief for the remaining 75% being given as a basic rate tax reduction.
  • For 2020/21 and later tax years relief is only available as a basic rate tax reduction.

Loss of higher rate relief

Deducting interest from rental income provides relief at the taxpayer’s marginal rate of tax. However, moving to a system of relief in the form of a basic rate tax reduction means that relief is only available at the basic rate. If you are a higher or additional rate taxpayer you will gradually lose tax relief at the higher and additional rates. Speak to your tax adviser about what these changes mean for you.

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