14 November 2016

Changes from April 2017 will mean that income tax relief is to be restricted to the basic rate of tax on borrowing costs for the owners of let residential property.

Previously, landlords could deduct finance costs from rental income to calculate their profits, which were then taxed at the landlord’s income tax rate: a generous relief for higher rate taxpayers. The new measures are to be phased in gradually over four years, starting from 6 April 2017.

The new measures

Individual landlords and trustees who own let residential property will no longer be able to deduct finance costs from their property income. All rental income will be taxed at the landlord’s marginal rate and then a 20% relief for finance costs will apply as a reduction to their income tax liability. The effect of this is to limit the income tax relief to 20% of finance costs. The impact will be greatest on higher rate tax payers.

Commercial properties and furnished holiday lets will be unaffected.

What should I do?

If you think you may be affected by these changes there are a number of options which may be available, including restructuring your property investments and incorporating property lettings into a company structure.

Restructuring options

For example landlords may wish to consider investing in commercial property instead of residential property or consider letting residential properties as furnished holiday lets.

Incorporating a property lettings business

This option could allow landlords to protect themselves from the changes and it is likely to be advantageous where a landlord has multiple properties and where profits are generally re-invested into the business. There are other considerations which would require careful consideration and planning, for example, capital gains tax and stamp duty land tax implications and other recent changes regarding the taxation of dividends. However this may be an option for some landlords.

This article was written by Claire Conlon.

Key contact

Tom Hewitt

Tom Hewitt Partner

  • Private Wealth
  • Head of Estates and Land
  • Head of Food and Farming

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