Any hope that the buy to let sector might have of a rethink by the new Chancellor over restructuring mortgage interest tax relief for landlords has been quashed.
Instead, the government has set out details of how the mortgage interest relief restrictions will be phased from April 2017.
In a post on the government website, the Treasury says finance costs won’t be taken into account to work out taxable property profits. “Instead, once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs” says the new guidance.
The change – phased in between next spring and April 2020 – affects UK resident individuals that let residential properties in the UK or overseas, non-UK resident individuals that let residential properties in the UK, individuals who let residential properties in partnership, and trustees or beneficiaries of trusts liable for income tax on property profits.
The guidance confirms that you will not be affected if you are a UK resident company, a non-UK resident company, a landlord of furnished holiday lettings.
The guidance goes on to say that the costs that will be restricted include interest on mortgages, loans – including loans to buy furnishings – and overdrafts.
It goes on to say: “If you take a loan for both residential and commercial properties, you’ll need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties. Only the finance costs for the residential property business are restricted. This also applies if your loan was partly for a self-employed trade and partly for residential property.”
A table published by HMRC suggests landlords will be able to deduct 75 per cent of finance costs from rental income in 2017/18 and use a 25 per cent basic rate tax reduction.
This becomes 50 per cent finance costs deduction and 50 per cent of basic rate tax reduction in 2018/19 before moving to 25 per cent and 75 per cent in 2019/20 before reaching no deduction of finance costs and 100 per cent basic rate tax reduction in 2020/21.