A UK LANDLORD WITH A UK RESIDENTIAL UNFURNISHED PROPERTY Post 4 of 5

Tax relief for residential landlords: how it's worked out

The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of Income Tax. This is being phased in from 6 April 2017 and will be fully in place from 6 April 2020.

Who’s affected

You’ll be affected if you’re a:

• UK resident individual that lets residential properties in the UK or overseas

• non-UK resident individual that lets residential properties in the UK

• individual who let such properties in partnership

• trustee or beneficiary of trusts liable for Income Tax on the property profits

All residential landlords with finance costs will be affected, but only some will pay more tax.

You won’t be affected by the introduction of the finance cost restriction if you’re a:

• UK resident company

• non-UK resident companies

• landlord of Furnished Holiday Lettings

You’ll continue to receive relief for interest and other finance costs in the usual way.

What’s included under the finance cost restriction

The finance costs that will be restricted include interest on:

• mortgages

• loans - including loans to buy furnishings

• overdrafts

Other costs affected are:

• alternative finance returns

• fees and any other incidental costs for getting or repaying mortgages and loans

• discounts, premiums and disguised interest

If you take a loan for both residential and commercial properties, you’ll need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties.

Only the finance costs for the residential property business are restricted. This also applies if your loan was partly for a self-employed trade and partly for residential property.

How the tax reduction is worked out

The reduction is the basic rate value (currently 20%) of the lower of:

• finance costs - costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward

• property business profits - the profits of the property business in the tax year (after using any brought forward losses)

• adjusted total income - the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance

The tax reduction can’t be used to create a tax refund.

If the basic rate tax reduction is calculated using the ‘property business profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.

You’ll still be able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction:

Tax year

Percentage of finance costs deductible from rental income

Percentage of basic rate tax reduction

2017 to 2018

75%

25%

2018 to 2019

50%

50%

2019 to 2020

25%

75%

2020 to 2021

0%

100%