Landlords to be hit by new Income Tax rules
Thursday 04 August 2016
From next year landlords will be hit by new rules which limit how much of their finance costs they can write off against tax to the basic rate of Income Tax.
The changes will be phased in over four years from April 2017 and will affect anyone who lets residential properties as an individual, or in a partnership or a trust.
If there is a silver lining to the cloud, it is the estimation that only 18 per cent of landlords will have additional tax to pay because the total income of the majority, without a deduction for finance costs, doesn’t exceed the higher rate threshold.
Finance costs will no longer be taken into account when taxable property profits are calculated - instead, once Income Tax has been assessed the liability will be reduced by a basic rate ‘tax reduction’ – which for most landlords will be the basic rate value of the finance costs.
Finance costs that will be restricted include interest on mortgages, loans (including loans to buy furnishings) and overdrafts.
Alternative finance returns, fees and incidental costs for getting or repaying mortgages and loans, as well as discounts, premiums and disguised interest will also be limited.
Landlords will still be able to deduct some of their finance costs during the transition, but those deductions will be replaced with a basic rate relief tax reduction completely by 2020.
The percentage of finance costs deductible from rental income will be 75 per cent from 2017 to 2018, 50 per cent from 2018 to 2019, 25 per cent from 2019 to 2020, and zero from 2020 onwards, when basic rate tax reduction will have risen to 100 per cent.
The reforms will also change the way taxable income is calculated. If landlords receive Child Benefit, for example, and their income is over £50,000, then a High Income Child Benefit Charge may apply.
The announcements were made in the Summer 2015 Budget, by then Chancellor George Osborne, and provoked a storm of protest.
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