The Summer Budget introduced a measure to restrict the amount of tax relief that landlords will be able to claim for finance costs on the purchase of residential properties.
This surprise move by the Government is likely to seriously affect owners of let properties, of which there are a high number in Lymington, the New Forest and surrounding areas.
From 6 April 2020 landlords will not be able to deduct ANY of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs. This will be phased in over 4 years from 6 April 2017.
By way of example, this will work as follows:
Interest paid... £10,000.
Currently - this is allowable as a deduction in computing net profit from Property Letting on which income tax is computed.
From 6 April 2020 – no interest cost is allowable in computing Property Letting income. Instead there will be an allowance against the total tax liability, at basic rate, currently 20%. Thus, total income tax liability will be computed and then an allowance given against the total liability of £10,000 @ 20% = £2,000
Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
This has further implications if that increases total income above the thresholds for Child Allowance and at £100,000 when personal allowances are withdrawn. , which is likely to entail a far higher tax bill than under the previous system.
Landlords will be able to obtain relief as follows:
- In 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax allowance against the total Self- Assessment tax liability
- In 2018-19, 50% finance costs deduction and 50% given as a tax allowance, at basic rate only
- In 2019-20, 25% finance costs deduction and 75% given as a tax allowance, at basic rate only
- From 2020-21 all financing costs incurred by a landlord will be given as a tax allowance, at basic rate only
The Chancellor’s Autumn Statement, to be delivered on 25th November, should put flesh on the bones of the changes announced in the Summer Budget. As the Government has a working majority, it is likely that most of the changes reported will become law in the near future. It is well worth keeping abreast of any developments in this area in case further changes or clarification is announced.
We recommend that all affected readers undertake a review of their tax position from April 2016 so that they are aware of the financial impact on their personal disposable income. For more information and advice, please contact us to discuss or make an appointment - we offer all new clients a free initial consultation. Further information and tax news can also be found on our website www.lashmars.co.uk, where you can sign up for our free monthly eNewsletter.
© Lashmars Tax Accountants 2015
This communication is intended to provide general guidance on matters of interest and you should not act or refrain from acting upon any information contained in it without seeking appropriate professional advice.