Landlord tax changes due in April 2017
While 2016 has seen notable tax changes for landlords, there is more to come in 2017. From April of 2017, a new rate of relief that landlords receive for finance costs will be put into place. This new status will restrict finance costs to the basic rate of income tax and it will be phased in over a number of years.
The key facts of the changes are:
- They apply to people who let properties (residential) by themselves, in a partnership or as part of a trust
- They will be phased in over a four year period, beginning in April 2017
- They will impact on how landlords get relief for finance costs and interest
- The tax relief will be available at the basic rate of tax
The change starts once the process of income tax on profits obtained from a property and any additional income sources have been assessed. At this point, the liability on income tax will be reduced at a basic rate and for the majority of landlords, this will relate to the basic rate value of any finance costs they incur.
This change has sparked heated debate amongst landlords
The fact that the change is going to be set at the basic rate has caused controversy and sparked debate. Landlords who are currently paying the basic rate will receive the 20% tax relief they expect or currently receive but for landlords in the 40% or 45% band would find that they too receive the 20% basic rate relief. This means the landlords who enjoy a higher rate of income will lose more with respect to their mortgage interest payments.
Finance costs that will be affected include mortgages, loans, overdrafts, alternative finance returns, discounts, incidental costs of repaying loans and mortgages and other premiums and disguised interest payments.
The phased process will take place across four financial years
For the 2017/18 financial year, the percentage of finance costs which can be deducted from rental income will stand at 75% and the percentage of basic rate tax reduction will stand at 25%. In the 2018/19 financial year, this will move to a 50%/50% split between the percentage of finance costs and basic rate tax reduction.
In the third year of the process, 2019/20, the percentage of finance costs which can be deducted from rental income will stand at 25% and the percentage of basic rate tax reduction will stand at 75%. By 2020/21, there will be no allocation for finance costs deductible from rental income which means that the percentage of basic rate tax reduction will stand at 100%.
The higher the level of interest that is paid by a landlord, the harder the impact may be. Landlords who have a long-term fixed rate mortgage, which tends to be at a higher level may find that their profit is negatively impacted upon. It is important that landlords calculate the impact this change will have on them to determine if they can afford to continue to act in this role.