Buy to let income
Britain has long been regarded as a nation of property lovers, with getting on the property ladder being a top priority for many and investing in bricks and mortar regarded as not only desirable but also as safe as, well, houses.
However, in recent years the attractiveness of buy-to-lets has started to wane somewhat, with Stamp Duty Land Tax reforms in 2016 introducing a 3% surcharge on second homes and buy-to-let properties and the Brexit negotiations casting uncertainty over the stability of the housing market.
To add to this, HMRC introduced new legislation from 6th April 2017 restricting the income tax relief on finance costs incurred in respect of residential property income, mainly affecting those individuals paying tax at the higher and additional rate. By the 2020/21 tax year, finance costs will effectively attract relief at only the basic rate of tax (20%).
It is worth noting that although mortgage interest will be the main finance cost for most, the restriction in tax relief is not limited to this; it also includes interest on any other related loans i.e. to buy furniture, overdrafts, fees & other incidental costs of getting or repaying mortgages and loans.
HMRC are giving taxpayers “time to adjust” and are therefore phasing in these changes over four tax years with the 2017/18 tax year being the first year affected by the legislation. The below table shows how the phased restriction will be introduced:
|Tax year||Percentage of finance costs deductible from rental income||Percentage of finance costs producing basic rate tax relief|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
The reduction in the finance costs deductible from property income will have a consequential increase in the taxable income of an individual. For instance, whereas prior to these changes if a landlord had £1,000 of rental income and £200 of finance costs, net taxable income was £800. By 2020/21 net taxable income will be £1,000 with relief for the £200 finance costs being given as a £40 (i.e. 20% of £200) tax reducer.
Although these changes will mainly affect those paying tax at the higher and additional rate, it may also impact those basic rate tax payers close to the higher rate threshold. This is because some of their taxable income may now fall into the higher rate band, therefore paying tax at a higher marginal rate.
This increase in taxable income may also have an impact on a taxpayer’s entitlement to the personal allowance and pension contribution allowance as more income now exceeds these thresholds. Thus restricting an individual’s personal allowance and pension annual allowance.
These restrictions only apply to residential property and there are no such restrictions for commercial properties. Furnished holiday lets are also excluded from these restrictions; however, there are strict conditions to be met in order for a rental property to qualify as a furnished holiday let.
If you require further information in this area, please speak to your Barnes Roffe partner.
Blog written by Emma RemyTalk to Barnes Roffe today