A quick refresher on the impact of the new finance costs restrictions
In a nutshell, the tax relief that landlords of residential properties were able to claim for finance costs will be restricted to the basic rate of income tax. These changes will be phased in from April 2017.
Landlords that let residential properties as an individual in a partnership or trust and also non-UK resident individual that lets residential properties in the UK.
The following won’t be affected by the introduction of the finance cost restriction:
The above will continue to receive relief for interest and other finance costs in the usual way.
The amount of income tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax. The finance costs referred to above that will be restricted include interest on:
Other costs affected are:
The reduction is the basic rate value (currently 20%) of the lower of:
Note that:
The restriction will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.
Some of your finance costs can still be deducted during the transition period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.
A proportion of the finance costs will be used to work out the property profits and use the remainder to work out the basic rate tax deduction:
Tax year | % finance costs deductible from rental income | % basic rate tax deduction |
2017-18 | 75 | 25 |
2018-19 | 50 | 50 |
2019-20 | 25 | 75 |
2020-21 | 0 | 100 |
The calculations using the new measures can be quite complicated so we recommend that members work through the examples that HMRC has published. There are three case studies which illustrate both the phasing in and the overall effects of the restrictions before and after they are operated. They use the following simplified figures:
View these worked examples.
For further information, visit ACCA's website.