Following on from the introduction of the Stamp Duty levy earlier this year, and the amendments to the wear and tear allowance, residential landlords could see their profits reducing further from April 2017.
New rules will come into effect from April 2017 to restrict the relief for finance costs (such as mortgage interest) for residential property landlords (the rules do not apply to commercial property landlords).
The existing rules enable finance costs to be deducted from gross rental income in order to arrive at the taxable profits of a property business. If the landlord is a higher rate taxpayer, the existing rules permit them to obtain relief at their highest rate of tax.
From April 2017, under the new rules, relief will be restricted to 20% (basic rate) of the finance costs and will be available as a reduction in the tax liability as opposed to a deduction from gross income – regardless of which tax bracket they fall into.
The restriction will result in increased income tax liabilities for many residential property landlords.
As the new rules will increase ‘gross income’ of the individual, they could also have other implications such as the ability to claim child benefit.
The restriction will be phased in gradually between April 2017 and April 2020.
For example, if a higher rate (40%) landlord has gross rents of £8,400, spending £2,500 on repairs and other costs (which are tax deductible) throughout the year, and pays mortgage interest of £4,500 per annum the difference in tax liabilities is quite substantial.
In the tax year 2016/2017 the tax liability will be £560.
However, the same income and expenditure 2020/2021 (once the restrictions have been fully phased in) the landlord would see a tax liability of £1,460 – an increase of £900. Using this example, the landlord in question would have a tax liability which exceeds the “real profit” of the income from the rental property.
Whilst some landlords may consider simply increasing the amount of rental income, by passing the costs onto tenants, this may not only be achievable in the marketplace and may be counter-productive due to the increase in tax liability that a rental income brings with it.
If you have any queries in respect of the above, or want to understand if you can mitigate any of these liabilities please do not hesitate to contact Kelly Garside at kelly.garside@cowgills.co.uk.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
Disclaimer
The information was correct at time of publishing but may now be out of date.
