The tax relief available to residential landlords has been reduced from the start of the 2017-18 tax year. The new rules mean that tax relief on mortgage costs will be gradually restricted to the basic rate of tax. Landlords of residential properties have benefited from full tax relief on finance charges, such as mortgage interest for many years. However, these changes will significantly reduce the amount of tax relief for many buy-to-let landlords.
The reduction in the amount of tax relief available for finance costs for landlords are being phased in over the next four years and will affect many higher rate and additional rate taxpayers and particularly those with highly leveraged properties. The increase in taxable income could also have the knock-on effect of moving taxpayers into the higher tax rates, losing personal allowances and restricting the amount of tax relief on money invested in a pension.
The changes will also affect those who let residential properties in a partnership or a trust. Finance costs include interest on mortgages, loans - including loans to buy furnishings and overdrafts as well as alternative finance returns, mortgage fees and other costs and discounts, premiums and disguised interest.
Deductions from property income will be restricted to:
- 75% for 2017 to 2018
- 50% for 2018 to 2019
- 25% for 2019 to 2020
- 0% for 2020 to 2021 and beyond
The new rules apply to UK resident individuals that let residential properties in the UK or overseas, non-UK resident individuals that let residential properties in the UK, individuals who let such properties in partnership and trustees or beneficiaries of trusts liable for Income Tax on the property profits. Landlords of furnished holiday lettings, UK resident companies and non-UK resident companies are not affected by the changes.