With the restriction of finance costs for residential property businesses having come into force with effect from 6th April 2017, the 2018 Tax Return will be the first year that a number of taxpayers will notice a difference in their income tax bill with regard to their residential property business profits.
The restriction of finance costs is gradually being introduced over 4 years and will be fully implemented by the 2020/21 tax year. Finance costs include mortgage interest payments, interest on loans and incidental costs of obtaining loan finance.
An individual’s residential property business profits will be calculated without the deduction of finance costs and taxed accordingly. A tax reduction at the basic rate will then be given to allow relief for finance costs incurred. Once the new rules are fully implemented, the relief for finance costs will be restricted to the basic rate of tax (currently 20%).
For the current 2017/18 tax year, the deduction for finance costs from residential property income is restricted to 75%, with the remaining 25% available as a deduction as basic rate. From 6th 2018 the deduction for finance costs will reduce by 25% and this will continue each tax year until 6th April 2020 when there will be no direct deduction for finance costs and landlords will be given relief by way of the basic rate tax deduction.
These rules will affect higher and additional rate taxpayers the most; however basic rate taxpayers with substantial finance costs may also be affected and will need to be aware of these new rules.
The new rules are relevant to individuals, trustees, partnerships and limited liability partnerships, however companies are unaffected by the changes. In addition, landlords of commercial properties, such as furnished holiday let accommodation, are not subject to these changes.
Going forward, it is evident that these new rules will have a significant effect on residential property businesses, and it is vital that landlords review how these changes may impact their businesses. It is advisable that landlords consider the most appropriate structure for their property business to ensure that they are in the best possible position.
Advice specific to circumstances should be taken and if you require assistance in connection with this or any other tax matter, please contact Magnus Leonard at Rennie Welch on 01573 224391 or by email at email@example.com.
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