Buy to let properties

11 June 2018

Landlords who let residential properties are continuing to face a reduction in their rental profits as higher rate tax relief has been restricted on the costs of finance, such as mortgage interest, from 6 April 2017.

The extra tax paid may well be greater than profits leaving landlords with a rental loss and a cash shortfall. This will affect individual landlords, partnerships, trustees and beneficiaries but will not affect companies owning buy-to-let property as companies are excluded. The rules do not apply to land and property dealing, development, commercial lettings or furnished holiday lets.

Landlords affected could be pushed into a higher rate of Income Tax as a result of the finance cost restriction that may lead to a reduced Personal Allowance, affect the entitlement to Child Benefit and restrict the amount on which tax relief for pension contributions can be claimed. 

The change is being phased in over four years and all finance costs (not just mortgage interest) will no longer be an allowable expense from 2020 onwards. Instead, there will be a basic rate tax deduction of up to 20% of the finance costs not deducted in calculating the rental profits which will be set against the Income Tax liability for the tax year. The change applies to the letting of residential properties both in the UK and abroad.

The available tax reduction will be calculated as 20% of the lower of the: finance costs not deducted from income in the tax year (from 2020 this will be all of the financial costs incurred), profits arising from the residential property letting in the tax year after using any brought forward property losses, and total income (after losses and reliefs and excluding savings and dividend income) that exceeds the Personal Allowance in the tax year. The 20% tax reduction cannot create a tax repayment.

Finance costs will include mortgage interest, interest on loans to buy furnishings, incidental costs of obtaining finance such as fees and commissions, legal expenses for loan agreements or valuation fees for security of a loan.

Tenants may well be hit the hardest as they are likely to see rent increases over the next few years.

Planning ahead will help determine whether a landlord will become a higher rate taxpayer as a result of the changes to the deductibility of finance costs for residential property lettings. We can advise on potential solutions to reduce your taxable income and the most tax efficient way to run a buy-to-let property business. 

If you would like more advice on this matter please contact Emily Hillier on ehillier@ellacotts.co.uk or 01295250401.