If you let out a property, your financial position will have changed from 6th April 2017. Why? Because the government has restricted relief for finance costs on residential properties to the basic rate of income tax.
Landlords will no longer be able to deduct all finance costs from property income to arrive at profits. Instead, you will receive a basic rate reduction from your income tax liability for your finance costs.
The new regime is being phased in over the next few years. According to HMRC, the relief you can obtain is as follows:
• in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic-rate tax reduction
• in 2018 to 2019, 50% finance costs deduction and 50% given as a basic-rate tax reduction
• in 2019 to 2020, 25% finance costs deduction and 75% given as a basic-rate tax reduction
• from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic-rate tax reduction
If you’re a basic-rate taxpayer there shouldn’t be an issue, but it’s worth remembering that your status might depend on the current system. The changes may actually push you into the higher-tax bracket.
Beware, there are potentially knock-on implications. If, for instance, you or your partner receive child benefit and your income is over £50,000, you might have to pay a charge or opt out of the benefit.
There’s no doubt that the changes will adversely affect many landlords, leading some to question whether they want to invest further. It may be that others will decide in due course to sell, believing that it is difficult to make adequate profit from the buy-to-let market.
If you are concerned about the changes, it’s time to look closely at the implications with your accountant.