Changes to tax relief for residential landlords - worked examples

Changes to Tax Relief for Residential Landlords

 

The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income Tax, this will be phased in from April 2017.

 

WHO IS AFFECTED:

 

  • UK resident individual that lets residential properties in the UK or overseas
  • non-UK resident individual that lets residential properties in the UK
  • individual who let such properties in partnership
  • trustee or beneficiary of trusts liable for Income Tax on the property profits

 

IT WONT AFFECT:

 

  • UK resident company
  • non-UK resident companies
  • landlord of Furnished Holiday Lettings
  • commercial properties

 

WHAT IS MEANT BY FINANCE COSTS:

 

  • mortgages
  • loans - including loans to buy furnishings
  • overdrafts
  • alternative finance returns
  • fees and any other incidental costs for getting or repaying mortgages and loans
  • discounts, premiums and disguised interest

 

HOW DOES IT WORK:

 

Finance costs won’t be taken into account to work out taxable property profits. Instead, once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.

The restriction will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.

 

You’ll be able to use some of your finance costs to work out your property profits and use your remaining finance costs to work out your basic rate tax deduction:

 

Tax Year

Percentage of finance costs deductible from rental income

Percentage of basic rate tax reduction

2017 to 2018

 75%

25%

2018 to 2019

50%

50%

2019 to 2020

25%

75%

2020 to 2021

0%

100%

 

How the tax reduction is worked out

 

Guidance used from:

 

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

 

The reduction is the basic rate value (currently 20%) of the lower of:

 

  • finance costs - costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
  • property profits - the profits of the property business in the tax year (after using any brought forward losses)
  • adjusted total income - the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance

 

The tax reduction can’t be used to create a tax refund.

 

Please note:

 

If the basic rate tax reduction is calculated using the ‘property profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.

The purpose of these examples is to help you understand the impact of the changes on you as an individual landlord. The examples don’t demonstrate the impacts for partnerships or trusts.

To simplify the case studies, the Income Tax rates and Personal Allowances for the 2016 to 2017 tax year have been used throughout these examples. These are:

 

  • Personal Allowance - up to £11,000
  • basic rate - £11,001 to £43,000
  • higher rate - £43,001 to £150,000

 

To SEE some numerical worked Examples please CLICK HERE

 

If you have any questions about this please do contact our Sunflower Accounts office, so that we can discuss your questions.

 

 

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