Restrictions on Finance Cost Reliefs for Individual Landlords
Previously, 100% of finance costs have been allowable for tax relief, however, new restrictions on finance costs mean that landlords are no longer allowed to deduct all of their finance costs from their rental income to calculate their property profits.
The restrictions are being gradually phased in, beginning in the 2017 to 2018 tax year with 75% of finance costs deductible from rental income and the remaining 25% given as a basic rate deduction.
Ultimately, the restrictions on finance cost relief will increase rental profits, leading to an increase in total income for landlords. In some cases, this may push some landlords into higher rates of tax.
Who is affected?
Those affected include individuals receiving rental income from residential properties in the UK. It will not affect companies or those receiving income from furnished holiday lets or commercial properties.
What counts as finance costs?
Finance costs, also known as borrowing costs, are defined by the International Accounting Standard as “interest and other costs that an entity incurs in connection with the borrowing of funds”. These therefore include costs such as mortgage interest and loan interest.
- 2018 to 2019 tax year – 50% of finance costs deductible from rental income, 50% given as a basic rate tax reduction
- 2019 to 2020 tax year (current tax year) – 25% of finance costs deductible from rental income, 75% given as a basic rate tax reduction
- 2020 to 2021 tax year – 0% of finance costs deductible from rental income, 100% given as a basic rate tax reduction
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