Tax relief changes for landlords


Tax information is based on our understanding of the proposed tax legislation as at 29 April 2016, and may be subject to change.

No information on this site should be taken as tax advice. For advice you should consult with an independent tax adviser.

At present, landlords can deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.

The changes will be phased in from April 2017, as the table below shows.



Key Changes:

In summary:

  • The changes are effective from the 2017/18 financial year and will be phased in over four years.
  • Mortgage interest tax relief will be limited to the basic rate of tax, currently 20%, and given as a reduction in tax liability instead of a reduction to taxable rental income.
  • The changes mean that the basic rate tax payers could find themselves pushed into a higher rate band as a result
  • There’s no impact on tax liability for landlords who remain as zero or basic rate payers, after calculating taxable income under the new rules
  • Other allowable costs, on an actual cost basis, can still be deducted from gross rental income for the purposes of determining taxable income.

Potential impacts:

  • Higher rate and additional rate tax payers will pay more in tax, as tax relief on mortgage interest will be limited to the equivalent level of a basic rate tax payer (currently 20%)
  • With taxable income now being calculated without a deduction for finance costs, some landlords may experience an upward movement in tax bands
  • It could be possible that some landlords currently making a small net profit will experience negative cash flow after tax.


Most Impacted

  • Existing higher rate tax payers (40% and 45%)
  • Landlords with marginal rental cover (high mortgage costs relative to rental income)
  • Tax payers moving into the higher rate tax band as a result of the changes
  • Landlords with strong rental cover
  • Lower rate tax payers remaining in the same band and unencumbered landlords are unaffected.


Examples:

To help you understand how the changes could affect you, we’ve calculated the following scenarios.

All figures used in the following examples are for illustrative purposes only. You should seek independent tax advice if you’re uncertain as how this affects your personal circumstances.






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