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Residential landlords’ tax changes complete April 2020

Source: HM Revenue & Customs | | 01/10/2019

The tax relief on finance costs used to buy investment properties is being gradually restricted to the basic rate of tax. The full finance costs restriction will be in place from 6 April 2020. This means that from next April, all finance costs will be disallowed as expenses and any relief will be restricted to a basic rate tax credit.

Finance costs include interest on:

  • mortgages,
  • loans - including loans to buy furnishings
  • overdrafts as well as alternative finance sources

Costs also include mortgage fees.

The new rules have been gradually phased in since April 2017. If you are a residential property landlord, you are likely to have faced higher tax bills as the relief on finance charges has been restricted. These changes have significantly affected the tax paid by many higher rate and additional rate taxpayers and particularly those with high levels of borrowing.

The amount of tax relief available for finance costs is currently restricted to 25% as an expense and the remainder as a basic rate tax credit. From 2020-21, there will be no additional relief on finance costs for higher rate taxpayers.

The gradual increase in taxable income – as finance costs are disallowed as expenses – could also push landlords’ income into the higher rate Income Tax bands. Also, landlords may lose all or part of their personal allowance if this recalculation of taxable income is greater than £100,000.

The finance cost restrictions apply if you are a UK resident individual that lets residential properties in the UK or overseas, a non-UK resident individual that lets residential properties in the UK, involved with a partnership that lets properties or if you are a trustee or beneficiary of a trust liable for Income Tax on the property profits.

Landlords of furnished holiday lettings are not affected by the restriction on finance costs.

Planning note

Landlords reading this reminder would be advised to rework their property rental business plans as the changes for owners with high levels of borrowing could be prohibitive. Please call if you need our help.



 

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