Landlord Tax Changes 2017: What You Need To Know

In 2017, some crucial changes to residential landlord tax came into force. Originally announced back in 2016, these changes are gradually being rolled out over the course of four years, to give landlords time to adjust. Here we explain what the changes are, who they’ll affect, and what they mean for you as a landlord.

What Are The Residential Landlord Tax Changes?

In summary, the amount of income tax relief landlords can receive on residential property finance costs is gradually being brought down to the basic rate of tax.

Up until last year, residential landlords were able to deduct mortgage interest and other financial costs from their rental income before calculating their tax liability. From April 2020, tax relief for finance costs will be restricted to the basic rate of income tax (currently 20%).

Under the new scheme, tax relief will be given as a reduction in tax liability, rather than as a reduction on taxable rental income. This means finance costs won’t be taken into consideration when working out your taxable property profits. Instead, your income tax liability will be reduced by a basic rate tax reduction, once your property profits and any other income sources have been assessed. For the majority of landlords, this’ll be the basic rate of 20%.

What’s Included Under The Finance Cost Restriction?

The finance costs that’ll be restricted include interest on mortgages, loans (including those used to buy furnishings) and overdrafts. If you’ve taken out a loan for both residential and commercial properties, you’ll need to split out the interest that relates to the residential properties only, as this scheme doesn’t apply to commercial properties. This is also the case if your loan was partly for a self-employed trade and partly for a residential property.

Other costs which’ll be affected under the landlord tax changes 2017 include:

            ●Fees and any other costs for getting or repaying mortgages or loans

●Discounts, premiums and disguised interest (returns which may be viewed and therefore taxed as interest)

●Alternative finance returns, such as bridging finance or peer-to-peer lending

Who Will The Changes Affect?

The new rules apply to:

●UK residents who let residential properties in the UK or overseas

●Non-UK residents who let residential properties in the UK

●Individuals who let residential properties in partnership

●Trustees or beneficiary of trusts liable for income tax on property profits

If you want to find out more about being an overseas landlord, read Non-Resident Landlords: An Expert Guide .

While all UK-based residential landlords with finance costs will be affected, not everyone will have to pay more tax. It’s also important to note that these changes won’t just affect higher rate taxpayers. Once your rental income has been considered in tax calculations, some basic rate taxpayers will be pushed into the higher banding. If you’re at the lower end of the scale, you may also see your liabilities increase.

If you’re a landlord who owns solely commercial properties or furnished holiday lettings, or you represent a company holding residential property, you won’t be affected. You’ll continue to receive relief for interest and other finance costs as usual.

When Will These Changes Impact Landlords?

The first phase of the process to introduce these changes was rolled out in April 2017. Since then, landlords have only been able to offset 75% of mortgage interest payments, rather than the usual 100%.

The gradual implementation of these changes will continue until April 2020, by which point landlords won’t be able to offset any of their mortgage interest payments.

Here’s how the changes will be rolled out:

Tax year

% of finance costs deductible from rental income

% of basic tax rate reduction

2016 - 2017

100%

0%

2017 - 2018

75%

25%

2018 - 2019

50%

50%

2019 - 2020

25%

75%

2020 - 2021

0%

100%

This transition period means landlords can still deduct some finance costs over the next few years, and will have time to adjust to the changes. If you’ll be affected by this new legislation, you can use this as an opportunity to assess your financial situation and put in place any necessary plans to mitigate the impact of the changes.

Find out more about landlord tax in our easy-to-use guide.

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