George Osborne’s summer budget 2015, and the subsequent Finance (No2) Act 2015, introduced far ranging changes to the income tax relief that can be claimed by individual landlords for finance costs.
George believed that property landlords were adding too much inflationary pressure to the UK’s housing stock. To remedy this, he set out to reduce the income tax relief available to buy-to-let landlords; after all, income tax relief for home owners has been denied for many years. It is intended that this levelling of the playing field will enable home buyers to compete more effectively as the demand from marginal buy-to-let investors is reduced.
This change has teeth, sharp teeth. From 6 April 2017, landlords (subject to income tax on their letting profits) will gradually lose the right to claim a deduction for finance costs: these are primarily, but not limited to, mortgage or loan interest payments. In its place, landlords can claim a tax credit based on 20% of the disallowed costs.
At a stroke this will deny higher rate tax relief on the disallowed costs. The reduction is to be introduced in stages starting April 2017 and be fully implemented by April 2020.
The changes also have a rather insidious side effect. Under certain circumstances, basic rate taxpayers will find themselves promoted to the higher rate tax band, and this with no increase in rental profits. Those most at risk are landlords who have borrowed heavily to grow their property portfolios and have high levels of rental income matched by high levels of finance costs.
This article is a repeat of our past exhortations to landlords: start planning for these changes now.
If your circumstances fit the most unfavourable combination of rental income to finance costs the effects on your income tax liabilities could be dire. This point cannot be overemphasised; for no change in your property business profits you may experience significant increases in tax due.
Planning is key. If you are concerned that you may be affected, please call.