Restricted tax relief for landlord finance costs

11 April 2019

The 2019-20 tax year is the third year of a four year phased implementation of the Chancellor’s strategy to restrict the tax relief residential landlords' receive on finance costs to the value enjoyed by basic rate taxpayers.

Prior to 2017-18, landlords were able to deduct 100% of finance costs against property income, therefore benefitting from tax relief at all tax rates, for example, 40% for higher rate taxpayers.

After 2020-21, individuals will only be able to claim a basic rate tax reduction from their Income Tax liability, on the portion of finance costs not deducted in calculating the profit.

This tax reduction will be calculated as 20% of the lower of:

  1. Finance costs not deducted from income in the tax year
  2. Profits of the property business in the tax year
  3. Total income of the individual (excluding savings income & dividend income) that exceeds the personal allowance in the tax year.

The percentage of finance costs not deductible from property income within the phased implementation is:

2018-19 2019-20 2020-21
50% 75% 100%

 

In the 2018-19 tax year, 50% of finance costs were fully deductible from property income to arrive at rental profits and a basic rate tax reduction is needed for the remaining 50% not deductible from property income. By 2020-21 no finance costs will be deductible from property income and the tax reduction will need to be calculated on the full amount of finance costs.

Where relief is restricted to 20% but the tax reduction cannot be deducted due to the above restriction, it may be carried forward to future years.

What can you do to minimise your tax liabilities?

  • If a basic rate and higher rate taxpayer jointly own property, think about changing the ownership proportions.
  • Can your borrowings be rearranged?

What is Property Allowance?

From 6 April 2017, HMRC introduced a Property Allowance, allowing up to £1,000 each tax year in tax-free allowances to claim against property income.

  • If annual gross property income exceeds £1,000 - use the tax-free allowance of £1,000 instead of deducting any expenses or other allowances. This is a useful way of reducing taxable property income.
  • Up to £1,000 of Property Allowance can be claimed, limited to property income. This is known as ‘partial relief’.
  • If expenses are more than property income or more than £1,000, claiming actual expenses will be preferable to claiming the £1,000 allowance.

Joint rental income for married couples or civil partners

Rental income is normally split according to the legal ownership of a property. However, for married couples or civil partners who own a property as joint tenants or tenants-in-common, the income for tax purposes is split 50:50 by default, regardless of actual ownership.

Property can be owned in unequal shares as tenants-in-common either by actual or beneficial ownership. If you wish to vary the beneficial ownership proportions then you need to make a joint election on HMRC’s Form 17.

Need help on how to reduce your tax liabilities on your rental property?

These are all matters that the Ellacotts team review regularly with clients. Please contact Helen King on hking@ellacotts.co.uk or 01295 250401 today if you would like more information on any of the above, or to discuss any potential worthwhile changes to your property arrangements.