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Finance Cost Relief - What is it?

12 Oct 2015

2 minute read

Q: I am a landlord. Now that the dust has settled after the Summer Budget, how will the announcements affect me?

A: In the Emergency Summer Budget the Chancellor of the Exchequer, George Osborne, announced that he was intending to restrict what he called finance cost relief for individuals. In reality what this means is that any landlord who is a higher or additional rate taxpayer will pay more tax in the future than at present.

This change will effect individuals that receive rental income on residential property in the UK or elsewhere and pay costs including mortgage interest. The only exception will be if the property in question qualifies as a furnished holiday let. It is intended that relief on mortgage interest and arrangement fees will be restricted to the basic rate of Income Tax. This will be introduced gradually from 6th April 2017.

Landlords will no longer be able to deduct all their mortgage interest from their property income to arrive at their property profits for tax purposes. Instead, they will receive a basic rate deduction from their income tax liability for their mortgage interest. The proportion of finance costs landlords obtain relief upon at the different rates will be as follows:

Basic rate deductionFull tax relief
2017/1825%75%
2018/1950%50%
2019/2075% 25%
 2020/21 100%

 0%

The reason for the change is ‘to make the tax system fairer’ and whilst it is true that one in five landlords is a higher or additional rate taxpayer, by 2020/2021 it is estimated that it will bring a further £665 million to the Treasury. The actual impact remains to be seen but we suspect that many landlords will now consider a corporate entity for their property portfolios. The measure does not come into place until April 2017 as mentioned above so there is plenty of time to plan your tax affairs accordingly. 

We will be happy to assist in this area, as well as providing independent mortgage advice for landlords. Please conatct Iain Ferrie on 01865 292200 or email iain.ferrie@shawgibbs.com.

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