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:
IT WONT AFFECT:
WHAT IS MEANT BY FINANCE COSTS:
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:
Percentage of finance costs deductible from rental income
Percentage of basic rate tax reduction
2017 to 2018
2018 to 2019
2019 to 2020
2020 to 2021
How the tax reduction is worked out
Guidance used from:
The reduction is the basic rate value (currently 20%) of the lower of:
The tax reduction can’t be used to create a tax refund.
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:
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.