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Restrictions to finance costs relief for landlords

Due to new legislation that came into effect from April 2017, the tax relief on finance costs for residential landlords is being gradually restricted to a relief given at the basic rate of tax (20%). Finance costs that will be restricted include mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages and loans.

 

Landlords will no longer benefit from being able to deduct all of their finance costs from their property income. These changes will affect many higher rate and additional rate taxpayers as relief on finance costs will only be given at 20%, rather than at 40% or 45%. The increase in taxable income, as a result, may also have a ripple effect of shifting taxpayers into higher tax bands, losing personal allowances, and restricting allowances available on pension growth / contributions.

 

These restrictions will affect UK residents that let residential properties in the UK or overseas, and non-UK resident individuals that let residential properties in the UK. In addition, individuals who let residential properties in partnership and trustees or beneficiaries of trusts liable for income tax on property profits. These restrictions do not affect landlords of furnished holiday lettings and do not apply to companies or commercial lettings.

 

The restrictions to finance cost relief are being phased in gradually as follows:

 

2017-18                   75% of finance costs allowed as a deduction from property income

                                25% of finance costs being available as a basic rate tax reduction (20%)

 

2018-19                   50% of finance costs allowed as a deduction from property income

                                50% of finance costs being available as a basic rate tax reduction (20%)

 

2019-20                   25% of finance costs allowed as a deduction from property income         

                                75% of finance costs being available as a basic rate tax reduction (20%)

 

2020-21                  100% of finance costs being available as a basic rate tax reduction (20%)