From April 2017 the tax relief that landlords of residential property currently receive on their finance costs will begin to be restricted.
The income tax relief that buy-to-let landlords currently receive on their finance costs will gradually be restricted to the basic rate of income tax (20%) over the next few years.
Who will be affected?
The changes will affect the following:
- UK resident individuals letting residential properties in the UK or overseas
- non-UK resident individuals letting residential properties in the UK
- individuals who let residential properties in a partnership
- trustees or beneficiaries of trusts which are subject to income tax on UK rental profits.
The introduction of the finance cost restriction will not affect the following:
- UK resident companies
- non-UK resident companies
- landlords of ‘Furnished Holiday Lettings’.
The above will continue to receive tax relief on interest and other finance costs in the usual manner.
What does the finance cost restriction include?
The finance costs that will be restricted includes interest suffered on:
- loans – including loans used to buy furnishings
Other costs affected are:
- Alternative finance returns
- fees and any other incidental costs for obtaining or repaying mortgages and loans
- discounts, premiums and disguised interest.
Interest and finance costs on loans which relate to both residential and commercial properties will need to be reasonably apportioned. A similar apportionment will apply where the loan was partly for a self-employed trading business and partly for a residential property business.
When will the restrictions be phased in?
The restriction will be gradually phased in from 6 April 2017 with the full restriction in place from 6 April 2020.
However during the transitional period (between 6 April 2017 and 6 April 2020) a percentage of the finance costs will be allowable.
|Tax year||Percentage of finance costs deductible from rental income||Percentage of basic rate tax reduction|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
These changes will affect a large number of individuals (both UK resident and non-UK resident) holding buy-to-let properties in the UK.
From 6 April 2017 legislation is set to be introduced which will bring UK residential property held via corporate entities within the scope of UK Inheritance Tax (IHT) (even those utilised by foreign domiciled individuals). This is a significant change and will affect a number of non-domiciled individuals who have used offshore structures in the past. This is in addition to the introduction of the Annual Tax on Enveloped Dwellings (ATED) regime, the ATED-related Capital Gains Tax (CGT) regime (both introduced in 2013), and the Non-Resident CGT regime (introduced in 2015).
Despite these changes there are still a number of options available to individuals who have already invested heavily in UK residential property, or those seeking to invest in UK residential property in the future. Please do contact one of the tax team if you would like to understand the options available to you.
These rules were announced at the Summer Budget 2015 and are contained in Finance (No. 2) Act 2015 as amended by Finance Bill 2016.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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