Tax relief restriction – landlords finance expenses
The Summer of 2015 may now seem a long time ago but you may recall that in his Summer Budget that year the then Chancellor George Osborne announced the introduction of new rules for landlords of UK residential properties.
George announced that the relief for mortgage interest and other financial charges against UK rental income was going to be restricted to the basic rate of income tax.
Previously landlords were able to claim full tax relief at their highest marginal rate of tax against such expenses.
As was George’s way these changes were not to be introduced immediately, in fact not until a couple of years after his Budget announcement. To soften the blow the new rules were to introduced gradually over a four year period.
Unfortunately, George’s legacy is now with us and the first year of the restrictions commenced on 6th April 2017 and will gradually restrict the relief further until 2020/21 when the full restriction will be in place.
Those landlords that will be affected by the new rules will not fill the pinch until they come to pay their tax bills for the 2017/18 tax year which will not be due until 31st January 2019.
A summary of how the new rules are being introduced follows:-
- In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
- In 2018/19, 50% of the finance costs will be given as deduction and the remaining 50% will be given as a basic rate reduction.
- In 2019/20, 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic rate reduction.
- From 2020/21 all finance costs will be restricted to a basic rate reduction.
To further illustrate the impact of the new rules I have prepared an illustration showing the impact over the tax years 2017/18 through to 2020/21. You can access a copy of the Illustration here:-
If you would like to discuss your property rental business and explore any potential tax saving opportunities, contact Paul Southward.