In the Summer Budget 2015, then Chancellor George Osborne announced restrictions to income tax relief for residential landlords. The proposals became law later that year and came into effect on 6 April 2017. Here we remind you of what the changes mean for landlords.
A summary of the changes to tax relief for landlords
The tax relief that landlords of residential properties can claim for finance costs will be restricted to the basic rate of Income Tax.
The types of finance costs affected by the changes include:
- loans – including loans to buy furnishings
- alternative finance returns
- fees and any other costs for getting or repaying mortgages and loans
- discounts, premiums and disguised interest.
You will find detailed information about the changes and how they affect you here.
Calculating your tax liabilities
In the 2017/18 tax year, the restriction of interest relief to basic rate of tax will apply to 25% of the interest. The remaining 75% of the interest will get relief against rental income in the normal way.
Landlords will first see the effect in the calculation of their tax liabilities for 2017/18 – the balancing payment for which is due by 31 January 2019.
A higher rate taxpayer will, in principle, get 5% less relief for finance costs (i.e. one quarter of 40% higher rate less 20% basic rate). Although 5% may not sound much, the overall picture can be worse than this due to 25% of the interest not being deductible from income. The result of this might be that total income crosses a threshold, such as:
- £50,000 – in which case Child Benefit may be clawed back
- £100,000 – in which case personal allowances may be reduced.
The restrictions are only set to get worse; please talk to your RfM advisor if you need clarification on any aspect of the rules.
The impact of Making Tax Digital for landlords
HMRC’s Making Tax Digital project also has an impact on many property businesses as of 6 April 2017. The government considers that all unincorporated businesses, except for the larger property business, will benefit from using the cash basis for their accounts rather than the usual accruals basis. With this in mind, it is proposing to make the cash basis its default basis.
If a business uses the cash basis, it accounts for income and expenses when the income is received and expenses are paid. Conversely, a business using the accruals basis will account for income received and expenses incurred over the period to which they relate.
Property businesses with cash basis receipts of more than £150,000 will remain on the accruals basis. The cash basis does not apply to property business carried out by a company, an LLP, a corporate firm (i.e. a partner in the firm is not an individual), the trustees of a trust or the personal representatives of a person.
It is proposed that the cash basis will first apply for the 2017/18 tax year. Your tax return for 2017/18, which must be submitted by 31 January 2019, will therefore be the first one completed on the new basis. You will have the option to elect out of the cash basis and stay with the accruals basis. We can help you make a decision on what is best for you later in the year.