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Reminder of changes to Buy-to-let tax relief from April 2017

With April 2017 fast approaching, we thought it time to revisit the changes that are coming into place with regards to loan interest relief on residential properties.  Currently, the full amount of the loan interest incurred is offset against the rental income that is received.  However, from April 2017 these rules will be phased out so that only basic rate (i.e. 20%) tax relief is awarded on the amount of interest that is paid, having a direct impact on higher rate tax payers.

 

The Changes.

 

Because the government does not want to cause substantial disruption in the short term to the residential let market, the change will be phased in from 2017/18 to 2020/21.  To lessen the impact, during this period the amount of interest that can be deducted will decrease and the proportion of the loan interest that will qualify for basic rate will increase.  During this period, landlords will be able to claim:

 

  • 2017/18 – 75% of interest costs against rent, 25% basic rate relief;

  • 2018/19 – 50% of interest costs against rent, 50% basic rate relief;

  • 2019/20 – 25% of interest costs against rent, 75% basic rate relief; and

  • 2020/21 – No interest costs against rent, 100% basic rate relief.

 

An example of how the rules would impact a higher rate taxpayer is as follows (assuming other income utilises their basic rate):

 

 

2017/18

2018/19

2019/20

2020/21

 

 

 

 

 

Rent received

15,000

15,000

15,000

15,000

Interest deduction (paid - £10,000)

(7,500)

(5,000)

(2,500)

-

 

 

 

 

 

Rental Profit

7,500

10,000

12,500

15,000

 

 

 

 

 

Tax @ 40%

3,000

4,000

5,000

6,000

Basic Rate relief on loan interest

 

 

 

 

£2,500 @ 20%

(500)

 

 

 

£5,000 @ 20%

 

(1,000)

 

 

£7,500 @ 20%

 

 

(1,500)

 

£10,000 @ 20%

 

 

 

(2,000)

 

 

 

 

 

Tax payable

£2,500

£3,000

£3,500

£4,000

 

 

 

 

 

 

 

 

 

 

 

Note:  Tax payable on this example under current rules would be £2,000.

 

As there are numerous issues to consider when deciding the most efficient way to hold buy-to-let properties, including individual circumstances and long term objectives of owning the property, please contact robinson+co’s Tax Manager Brett Bennett on 01900 603623 or brettbennett@robinsonco.co.uk

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