In the 2015 budget, the government announced that it will restrict relief on finance costs that individual landlords of residential property receive to the basic rate of tax. This started to be phased in from April 2017 and will be fully operational from 2020.
This includes mortgage interest and interest on loans for purchasing furnishings as well as the associated fees and incidental costs of financing.
As highlighted in a recent article in the Investor’s Chronicle, this new law applies to private individual landlords resident in the UK, and to residential rather than holiday homes (properties meeting the Furnished Holiday Let definition are excluded).
The changes are being phased in over a four-year period, to give landlords a chance to adjust.
These changes could push a large number of property investors into higher rates of income tax.
How the changes will be phased in
Section 24 will result in the amount of income tax relief landlords receive for residential property finance costs being restricted to the basic rate of tax. The changes will be phased in as follows:
- Landlords can currently offset 75% of their mortgage interest against profits with the 25% balance eligible for the basic rate tax reduction
- From April 2018, this will fall to 50% of mortgage interest against profits
- In April 2019, this will fall again to 25%
- In April 2020, it will be reduced to 0% and will be replaced in full by the tax credit of 20%
Around 8.2 million people in England will be affected by the changes.
It is important to note that interest payments will become a tax relief rather than a deduction from profits and so could push landlords’ total income into higher tax brackets and reduce or remove the availability of the personal allowance.
Those hit hardest will include higher and additional rate taxpayers. Landlords in the 40-45% tax bracket will pay more tax. Those in the 20% bracket could pay more if their gross income exceeds £45K.
How to deal with the changes
There have been a lot of suggestions in the press advising various ways to deal with the changes but the actual solution will require individual advice and planning as options depend on rental income levels, finance costs and other income.
It may be a good time to review financing costs and re-mortgage – lower monthly repayments may negate any increased tax burden.
For those with low levels of income or expenditure, the new tax allowance for property and trading income may prove useful as this provides £1,000 deduction from rental income instead of calculating actual expenditure incurred.
If you’d like to discuss how this might relate to your situation, call us on 01761 241 861 or email us today. We will be pleased to set up a telephone call or invite you into our offices in Paulton, near Bristol and Bath, for a consultation.