Following the changes to stamp duty on buy to let properties and second homes in April 2016, the UK Government has announced landlords will face another tax penalty with a reduction in the amount of tax relief they can claim on their mortgage interest payments.
Under the new rules, those paying higher rates of tax (40%) and top rate taxpayers (45%) will be restricted to the basic rate of 20% tax relief on the interest element of their finance costs. The change seeks to help homeowners compete with landlords in the property market.
Who Will The Changes Affect?
The changes will come into place from 6th April 2017 and will apply to individual landlords, partnerships and limited liability partnerships that let out residential properties in the UK or abroad – whilst all residential landlords with finance costs will be affected, the government predicts fewer than 1 in 5 (18%) landlords will end up paying more.
Landlords with the largest incomes are currently able to receive their relief at tax rates of 40% or 45%, therefore the changes will affect them primarily, by restricting tax relief available to the basic rate of income tax (20%).
In full, the change will affect:
- UK residents who let residential properties in the UK or overseas.
- Non-UK residents that let residential properties in the UK.
- Individuals who let residential properties in partnerships.
- Individuals who are a trustee or beneficiary of trusts liable for income tax on property
Those who will not be affected by the change will continue to receive relief interest and other finance costs in the usual way, these include:
- UK resident
- Non-UK resident companies.
- Individuals who are landlords of furnished holiday lettings.
Impact On Limited Companies
Because the changes do not affect limited companies, according to the National Landlord Association, 4 in 10 landlords are considering setting up a company to operate under in order to minimise the impact the new tax regime might have on them.
Landlords considering setting up as a company should, however, bear in mind the cost of incorporating and ensuring the ongoing compliance of the new company. If you are a landlord considering going down this route, First Call Financials can discuss the costs and possible implications with you. For a free initial consultation, give the team a call on 0117 3790810
What’s Included Under The Tax-Relief Restrictions
The finance costs that will have restricted tax relief on the interest elements include:
- Loans – including loans to buy furnishings.
In addition to this, other costs affected include:
- Alternative finance returns.
- Fees and any other incidental costs for getting or repaying mortgages and loans.
- Discounts, premiums and disguised interest.
What Will The Changes Mean For Tenants?
Whilst these changes will have no direct impact on tenants tax affairs, speculation has arisen that landlords will pass on some of the impact (the higher costs incurred) to the tenants by increasing rents or that in some instances landlords will exit the market reducing the availability of rental property with a further upward pressure on rental levels.If the changes have the desired effect the impact on tenants will actually be more positive. With a more even playing field created by reducing the advantages of landlords those currently renting should have a better chance of getting onto the housing ladder themselves.
Phased timetable for the Changes
The restrictions are to be phased in gradually from 6th April 2017, and will come fully into effect by 6th April 2020. Landlords will still be able to deduct some of their finance costs by working out their taxable property profits during the 3-year transitional period.
|2017/18||Allowable deduction restricted to 75% of financial costs – basic rate deduction on the remaining 25% of financial costs.|
|2018/19||Allowable deduction restricted to 50% of financial costs – basic rate deduction on the remaining 50% of financial costs.|
|2019/20||Allowable deduction restricted to 25% of financial costs – basic rate deduction on the remaining 75% of financial costs.|
|2020/21||Basic rate deduction on 100% of financial costs|
More Help and Information
If you are looking to purchase a buy to let property or are an existing landlord and want help to understand how these changes will impact you, or plan for them, give our friendly and experienced team a call on 0117 3790810 for help and advice.
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Categorised in: Industry News
This post was written by Steph Roffey