Tax relief for residential landlords
The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of Income Tax, this will be phased in from April 2017.
How the tax reduction is worked out
The reduction is the basic rate value (currently 20%) of the lower of:
- finance costs – costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
- property profits – the profits of the property business in the tax year (after using any brought forward losses)
- adjusted total income – the income (after losses and reliefs, and excluding savings, pensions and dividends income) that exceeds your personal allowance
The tax reduction can't be used to create a tax refund.
If the basic rate tax reduction is calculated using the 'property profits' or 'adjusted total income' then the difference between that figure and 'finance costs' is carried forward to calculate the basic rate tax reduction in the following years.
The restriction will be phased in gradually (25% at a time) from 6 April 2017 and will be fully in place from 6 April 2020.
More info at https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords and https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies