Restricting finance cost relief for individual landlords
Who is likely to be affected?Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting.
General description of the measureThis measure will restrict relief for finance costs on residential properties to the basic rate of income tax. This will be introduced gradually from 6 April 2017.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
- in 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
- in 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction.
- in 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
- from 2020-21 all financing costs incurred by a landlord will be given as a basic rate tax reduction.
To make the tax system fairer, the government will restrict the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the Government will introduce this change gradually from April 2017 over 4 years.
Background to the measure
This measure was announced in Summer Budget 2015.
This measure will have effect for finance costs incurred on or after 6 April 2017.
Current law on how to calculate the profits of a property business is included in Chapter 3 of Part 3 Income Tax (Trading and Other Income) Act 2005.
Legislation will be published in Summer Finance Bill 2015 to restrict deductions from property income for finance costs for residential properties for individuals and to introduce a tax reduction at the basic rate of income tax.
Deductions from property income will be restricted to:
- 75% for 2017-18
- 50% for 2018-19
- 25% for 2019-20
- 0% for 2020-21 and beyond
Individuals will be able to claim a basic rate tax reduction from their income tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of:
- the finance costs not deducted from income in the tax year (25% for 2017-18, 50% for 2018-19, 75% for 2019-20 and 100% thereafter),
- the profits of the property business in the tax year, or,
- the total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year.
Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
Summary of impacts
For detailed information on this, please visit the HMRC website by clicking here
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns.
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