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Finance costs restriction for landlords

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HMRC has published an overview of new rules restricting the relief available to landlords for finance costs associated with residential properties (see Relief will be restricted to the basic rate of income tax in phases, beginning in April 2017. Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits, but will instead receive a basic rate reduction from their income tax liability:

  • In 2017/18, the deduction will be restricted to 75% of finance costs, with 25% given as a basic rate tax reduction.
  • In 2018/19, the deduction will be restricted to 50% of finance costs, with 50% given as a basic rate tax reduction.
  • In 2019/20, the deduction will be restricted to 25% of finance costs, with 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.

Legislation for the change was first introduced in F(No. 2)A 2015. Finance Bill 2016 introduces amendments to:

  • clarify that beneficiaries of deceased persons’ estates are entitled to the basic rate tax reduction;
  • ensure that the total income restriction to the tax reduction applies where the relevant finance costs or property profits are higher than the total income;
  • ensure that total income is a measure of the net taxable income after other reliefs; and
  • ensure that any carried forward tax reduction is given in any subsequent year in which property income is received, even if there is no restriction on the deduction of finance costs in that year, for example, where the loan has been repaid.

The new rules include landlords who let residential property as individuals, or in a partnership or trust. Companies and furnished holiday lettings businesses are not affected.

Issue: 1319
Categories: News