Changes to tax relief for residential landlords

From April 2017 landlords of buy-to-let residential property will only be able to claim relief for finance costs at the basic rate of income tax. This applies to properties let by individuals or through a partnership. It does not affect landlords of furnished holiday lettings or properties let by limited companies.

If the loan is for a dual purpose, say for both residential and commercial properties, then the finance costs would have to be apportioned to calculate the residential property element.

This restriction is being phased in gradually from April 2017 and will be fully in place from 6 April 2020. During the transition period finance costs will be deductible but the amount will be reduced each year.

  Proportion of finance costs deductible from rental income: Proportion of costs available as a basic rate deduction:
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21   – 100%

The calculation is quite complicated and if you are a basic rate taxpayer you may find that you are a higher rate taxpayer once the finance costs are disallowed. This is because it increases the rental profits. If you do become a higher rate taxpayer then you will lose the higher rate tax relief on the finance costs.

Increasing taxable profits may also have affects upon tax credits and if it increases income to over £50,000 it could result in the loss of child benefit.

Where income is close to the higher rate threshold then the landlord may wish to consider making additional pension contributions or gift aid payments to ensure that they remain under the higher rate tax band.