Under the previous tax system, landlords could deduct all their mortgage interest cost from their rental income before calculating their tax liability. However, from April 2020 the tax relief on finance costs will be restricted to the basic rate of income tax which is currently 20%.
This is phased in from April 2017. Furthermore, Finance costs will not be taken into account to work out taxable property profits. Instead your Income Tax liability will be reduced by a basic rate ‘tax reduction’.
This legislation will affect all landlords (UK Resident, non-resident, individuals, partnerships and trusts) who are letting residential properties in UK. In the case of UK resident landlords, their overseas rental income will also be taxed this way. Companies will not be affected by this change in legislation.
Higher rate taxpayer Landlords will clearly be affected most and your tax advisor will be able to quantify the financial impact as the changes get phased in starting April 2017.
The restriction is being phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.
Percentage of finance costs deductible from rental income
Percentage of basic rate tax reduction
2017 to 2018
2018 to 2019
2019 to 2020
2020 to 2021