Restricting finance cost relief for individual landlords

It was announced in the 2015 Summer Budget that the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax.

This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years.

Who is likely to be affected

Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting.

General description of the measure

This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6 April 2017.

Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

 

Percentage of interest on which relief is available at

Year Ended

Top slice of

taxpayers income

Basic rate only

(Currently 20%)

5th April 2016 & earlier

100%

0%

5th April 2017

100%

0%

5th April 2018

75%

25%

5th April 2019

50%

50%

5th April 2020

25%

75%

5th April 2021

0%

100%

What do Finance Costs include?

Finance costs include:

  • Mortgage interest

  • Interest on loans to buy furnishings

  • Fees incurred when taking out or repaying mortgages or loans

Example:

Leonard Rigbsy has the following annual property income and expenses.

Rents Receiveable £ 50,000 Notes
Allowable property expenses £ 5,000 Excluding Mortgage Interest
  £ 45,000  
Mortgage Interest £ 10,000  
Net profit from Property Income £35,000  

He has no other taxable income

Current situation (2015/16)

Net profit from property income £ 35,000  
Personal Allowance £ 10,600  
Taxable £ 24,400 at 20% = £4,880

But with the same income in 2020/21 (and assuming the same personal allowances)

Profit before mortgage interest £ 45,000  
Personal allowances £ 10,600  
Taxable £ 34,400  
     
Of which in 20% band £31,785 at 20% = £6,357
and the excess in 40% band £ 2,615 at 40% = £1,046
Total Taxed £ 34,400  
Less tax releif on mortgage interest £10,000 at 20% = (£2,000)
Total Tax bill net of releif    £5,403

Comparing the tax burdon

Tax Payable per above £ 5,403
On 2015/16 basis per above £ 4,880
Extra tax payable as a result of this restriction £ 523

For information of users:
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.