The new landlords interest restriction limits tax relief for finance costs on residential properties to the basic rate of Income Tax. This is being introduced gradually from 6 April 2017. Finance costs cover mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

The rates at which landlords will be able to obtain relief is as follows:

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

If you are a basic rate taxpayer then you are likely to find nothing changes, although the way the landlords interest restriction is calculated could push some of your earnings into the 40% tax rate if you are already near the threshold. You could consider forming a company as there is no restriction on interest within a corporate structure, however it is important to remember that any transfer of ownership is going to involve a Stamp Duty charge and a possible capital gain which is subject to tax.  Please speak to us if this affects you and you would like some further advice on this matter.