Guidance issued on changes to tax relief for residential landlords

HMRC has issued guidance on the changes to tax relief for residential landlords which are to be phased in from April 2017. The changes will restrict relief for finance costs to the basic rate of income tax (tax relief).

It is vital for financial advisers to explain the position to any clients which may be affected by these changes (tax relief).

Despite calls, earlier this week, on new Chancellor Phillip Hammond to review the government’s approach to taxing the buy to let sector; HMRC has released guidance that sets out how the new rules restricting tax relief for residential landlords will operate in practice.

Under the new rules – which were announced at Summer Budget 2015 – finance costs (such as interest on mortgages or loans taken out to furnish the property) will no longer be taken into account to work out taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, a landlord’s income tax liability will be reduced by a basic rate ‘tax reduction’.

The rules apply to UK resident individuals that let out residential properties – whether in the UK or overseas – as well as to non-UK resident individuals who let out UK residential property. ‘Individuals’ for these purposes includes individuals who let such properties in partnership as well as trustees or beneficiaries of trusts liable for income tax on residential property profits. The rules do not apply to lettings of commercial properties; or to companies or landlords of furnished holiday lettings.

The restriction will be phased in gradually from 6 April 2017 – at a rate of 25% a year – and will be fully in place from 6 April 2020.

To sit alongside the new guidance, HMRC has also published a series of case studies which demonstrate the potential impact of the changes on individual landlords in a range of specific scenarios.

All individual landlords of residential property will need to consider their position. Existing higher/additional rate taxpaying buy-to-let investors with mortgage interest will be most profoundly affected, however, the changes could also move some basic rate taxpaying landlords into higher rate tax and/or affect entitlement to allowances, such as child benefit, personal allowances, annual allowances for pension plans and whether chargeable event gains suffer higher rate tax or not.