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January 24, 2018

Changes to Taxation of Landlords

With the 31 January deadline for 2016/17 tax returns fast approaching, many taxpayers and their agents are rushing to get their tax returns submitted on time and pay the tax due.  In all this rush it can be easy to miss one of the advantages to this time of year: considering the tax year ahead.

At PD Tax we often find that people are far more engaged with their tax affairs at this time of year.  With this in mind, it’s an ideal time to discuss what steps can be taken to make your tax affairs more efficient or to flag up issues which may be on the horizon.

For residential landlords in particular, 2016/17 will mark the end of a valuable tax relief which allows mortgage interest to be deducted from rental profits in full.  If you let out residential property then you should consider what options are available now before time runs out.

Previous Rules

Before 6 April 2017, landlords were entitled to deduct the cost of interest payments on loans when determining their rental profits.

For many landlords, this meant they could deduct the mortgage interest on their rental properties and gain tax relief at 20/40/45% for basic/higher/additional rate taxpayers.

New Rules

The new rules attempt to reduce the tax relief available for higher and additional rate landlords with highly levered rental properties, and are being phased in over four years beginning with 2017/18.

From 6 April 2017, the amount of interest that can be deducted when calculating rental profits will be restricted.  Instead, landlords will be limited to a new “basic rate tax credit” (BRTC) which can only reduce their tax liability.

The new rules will be phased in as follows:

Tax Year Interest deductible from rental profits Interest available for BRTC
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21+ 0% 100%

The BRTC will be 20% of the lower of (i) the interest subject to restriction, (ii) the property income for the year after brought forward losses, and (iii) the taxpayer’s total non-savings income after deducting their personal allowance.
Basic Rate Tax Credit

Any interest that isn’t used in the BRTC can be rolled forward for the BRTC in future years.

Next Steps

At PD Tax we still come across landlords with high interest payments who either have not realised how these new rules might affect them or who do not know how to deal with them effectively.

Now is an ideal time to have conversations with a tax advisor to help you understand what your tax bills will look like next year.

Contact us today to discuss your tax requirements.
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