Under the new measures, first outlined by the Chancellor in the Summer Budget of 2015, tax relief on mortgage interest has been reduced to the basic rate of income tax.
While some buy-to-let investors feel that the revisions lack clarity, the change means that finance costs such as mortgage interest or interest on loans to buy furnishings will no longer be deductible in full to work out taxable property profits.
The restrictions operate by disallowing finance costs when calculating the taxable rental profit, and then introducing a tax credit equal to 20 per cent of the disallowed costs.
Phased in over four years, the full restrictions will not be felt until the tax year 2020/21, allowing a short period for investors to adjust.
For 2017/18, investors will receive full relief on 75 per cent of mortgage interest, as per the old system, with the remaining 25 per cent subject to 20 per cent basic tax relief. For 2018/19, there will be a 50 per cent finance costs deduction and 50 per cent given as a basic tax reduction; for 2019/20 there will be a 25 per cent finance costs deduction and 75 per cent as a basic tax reduction, and from 2020 all interest will be restricted to 20 per cent relief.
Described as one of the most significant changes to the buy-to-let market in decades, the Chartered Institute of Taxation [CIOT] is urging landlords who no longer benefit from the relief against selling off portfolios, and instead to assess their options once the full restrictions are implemented in four years’ time.
While many individual residential investors are still unclear about whether they are affected by the change, CIOT is urging all parties to exercise caution before assuming that they are exempt.
For any landlords who are unsure, please do contact your local Carter Jonas office, who can assist with any queries or put you in touch with a tax advisor.
Partner Head of Residential Lettings
T: 020 7518 3234