Losing Interest in Buy to Lets?
Many landlords have invested in residential property rather than pensions, seeing this as the safer way to save for retirement and being able to benefit from increasing property values. However, this may all change following the government’s announcement in the summer that tax relief for interest payments will be restricted from April 2017. This seems to be a continuation of the government’s previous policy to increase the tax taken from residential property.
Interest relief – change from 6 April 2017
The government will restrict the amount of income tax relief landlords can get on residential property finance costs to the basic rate of income tax (20%). Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.
Landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate deduction from their income tax liability for their finance costs. To give landlords time to adjust, the government will introduce this change gradually from April 2017, over four years.
The restriction in the income tax relief for landlords will be phased in as follows:
- in 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
This restriction will not apply to landlords of furnished holiday lettings or to companies.
Many taxpayers are still confused over whether the rules will apply to them, particularly if they are currently basic rate tax payers. There is a common misconception that basic rate taxpayers will not be affected by the new rules but this is certainly not the case. There is no substitute for crunching the numbers for each landlord to see how they will be affected and if there are any measures they can put in place to limit the impact on their overall tax position.
If you would like to discuss how the rules might affect you, or if there is anything you can do to limit the impact of the new income tax relief for landlords rules on your personal circumstances, then please get in touch.