Tax changes for Property Landlords 2017

In its latest attempt to kerb the buy-to-let boom, the government has introduced a restriction on a number of finance costs a residential landlord can claim tax relief on.  The restriction is being phased in over 4 years. 

The changes mean that from 6th April 2017, 25% of mortgage interest (and other finance costs) will be restricted to tax relief at the basic rate (20%), irrespective of the rate of tax the landlord pays.  From 2018 the restriction will be 50%, then 75% from 2019, before finally 100% of finance costs being restricted from April 2020 onwards.

The restriction works by disallowing finance costs in calculating the taxable rental profit and then introducing a tax credit equal to 20% of the disallowed costs.  The changes will primarily affect higher and additional rate taxpayers, although in certain circumstances basic rate taxpayers can also be affected.

What do the new tax changes mean for landlords?

As an example, if a landlord has a property which is rented out for £12,000 per annum.  There is a mortgage on the property and the landlord pays £8,000 interest per annum.   Overall the landlord makes a £4,000 profit which is taxable. If a higher rate taxpayer the tax due will be £1,600.  From 6th April 2017, the landlord’s taxable profits will increase to £6,000 due to the 25% restriction on the mortgage interest.  The landlord will get tax relief on the restricted interest (£2,000) at the basic rate of 20%.  The tax due will then become £2,000 rather than £1,600.  From 2020 the tax will be £3,200.

The restriction only applies to individual landlords and not to companies, therefore it could be worthwhile considering the advantages of becoming a company, although this is not without difficulty and incorporation itself can involve tax charges. These may be stamp duty land tax or capital gains tax on the transfer of the properties into the companies, but depending on the circumstances, the tax relief could pay for itself.

Please contact us if you would like to discuss how these tax changes may affect you or to explore the idea of incorporation.

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