December 1st 2016

The tax relief that landlords of residential properties get is going to be restricted to the basic rate of Income Tax from April 2017, Kenny Logan investigates.
Kenneth Logan, JRW Edinburgh Office
These changes will undoubtedly affect you if you let residential properties as an individual, or in a partnership or a trust and will affect how you receive relief for interest and other finance costs.

Finance costs won’t actually 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 will be the basic rate value of the finance costs, this reduction will be gradually introduced over a four-year period starting in April 2017.

Who’ll be affected
•    A UK resident individual who lets residential properties in the UK or overseas.
•    A non-UK resident individual who lets residential properties in the UK.
•    An individual who let such properties in partnership.
•    A trustee or beneficiary of trusts liable for Income Tax on the property profits.

All residential landlords with finance costs will be affected, but only some will pay more tax.

You won’t be affected by the introduction of the finance cost restriction if you are a:
•    UK resident company.
•    Non-UK resident companies.
•    Landlord of furnished holiday lettings.

You’ll continue to receive relief for interest and other finance costs in the usual way.

What’s included under the finance cost restriction

The finance costs that will be restricted include interest on:
•    Mortgages
•    Loans – including loans to buy furnishings
•    Overdrafts

Other costs affected are:
•    Alternative finance returns
•    Fees and any other incidental costs for getting or repaying mortgages and loans
•    Discounts, premiums and disguised interest

If you take a loan for both residential and commercial properties, you will need to use a reasonable portion of the interest to work out your finance costs for the residential properties. Only the finance costs for the residential property business are restricted and this also applies if your loan was partly for a self-employed trade and partly for residential property.

Phased in
As we mention above, the restriction will be phased in gradually from early April 2017 and will be fully in place in April 2020. You will still be able to deduct some of your finance costs when you work out your taxable property profits during the transitional period, however these deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.

If you are a landlord and need advice on this change and how it will affect you, please don’t hesitate to get in touch with me or one of the team at JRW.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.