Tax relief changes for buy-to-let landlords
It is now only a couple of months until the changes to tax relief for buy-to-let landlords start to take effect. From April 2017, tax relief on mortgage costs is to be gradually restricted to the basic rate of tax. Landlords of residential properties have benefited from unrestricted tax relief on finance charges, such as mortgage interest for many years.
This change marks a seismic shift in tax relief for buy-to-let landlords and will leave many facing far larger tax bills than was previously the case. The reduction in the relief will be phased in over four years from April 2017, and will affect many higher rate and additional rate taxpayers and particularly those with highly leveraged properties. An increase in taxable income could also have the knock-on effect of moving taxpayers into higher tax rate bands, losing personal allowances and restricting the amount of tax relief on money invested in a pension.
The changes will also affect those who let residential properties in a partnership or a trust. Finance costs include interest on mortgages, loans – including loans to buy furnishings and overdrafts as well as alternative finance returns, mortgage fees and other costs and discounts, premiums and disguised interest.
Deductions from property income will be restricted to:
- 75% for 2017 to 2018
- 50% for 2018 to 2019
- 25% for 2019 to 2020
- 0% for 2020 to 2021 and beyond
The balance of any tax relief will be restricted to a basic rate tax credit.
The new rules apply to UK resident individuals that let residential properties in the UK or overseas, non-UK resident individuals that let residential properties in the UK, individuals who let such properties in partnership and trustees or beneficiaries of trusts liable for Income Tax on the property profits.
Landlords of furnished holiday lettings, UK resident companies and non-UK resident companies are not affected by the changes.