From 6 April 2017 the tax relief that residential landlords receive on the costs of finance for UK residential property will gradually be restricted down to the basic rate of tax.\u00a0 Currently the finance costs are an allowable expense when calculating property profits and so tax relief is obtained at the individual\u2019s marginal rate of tax at up to 45%.\u00a0 The changes mean that finance costs will no longer be an allowable expense and instead the individual\u2019s income tax liability will be reduced by the basic rate tax relief (currently 20%) on the finance costs.<\/p>\n
The restriction will be fully in place by April 2020. \u00a0During the transitional period a proportion of the finance costs will be an allowable deduction and the remainder restricted to basic rate tax relief.\u00a0 For 2017\/18 75% of the finance costs will be an allowable deduction, this reduces to 50% for 2018\/19, 25% for 2019\/20 and then for 2020\/21 none of the finance costs will be an allowable deduction.<\/p>\n
For example, an individual who has rental income of \u00a320,000 with mortgage interest of \u00a310,000 and who is a 45% taxpayer will get the full \u00a310,000 of finance costs as a deducible expense receiving tax relief of \u00a34,500.\u00a0 This same individual with the same income and expenses in 2020\/21 will only receive basic rate tax relief on the finance costs which is \u00a32,000.<\/p>\n
The new restriction will not apply to corporate landlords, furnished holiday lets or commercial properties.<\/p>\n