Rental tax changes

Rental tax changes

Future restrictions to tax relief on interest in residential rental businesses

From April 2017 further restrictions on tax relief will apply to loan interest paid in residential rental businesses for individuals, partnerships, trusts and personal representatives, with the restriction in relief being phased in over four years, as follows:

  • In 2017/18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction (see below).
  • In 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction.
  • In 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
  • From 2020/21 all financing costs incurred by a landlord will be given as a basic rate tax reduction (ie 20%).

The basic rate tax reduction will be available to individuals (including individual partners), but based upon the draft legislation introduced in the Summer Finance Bill, the basic rate tax reduction will not be available to trusts, settlements and personal representatives.

The draft legislation also states that where there is a mix of borrowings for residential and commercial let property, the restricted deduction will be apportioned on a just and reasonable basis referable to so much of the business as is carried on for the purpose of generating income from residential dwellings (excluding furnished holiday lets).

This will affect many farming businesses, including partnerships and estates, where borrowings have been restructured to set loan interest against rental income, away from the farming business where profits are more variable.  In these situations, it may well be worthwhile re-examining how borrowings are structured.

HMRC provided guidance on how finance costs should be apportioned in October 2016, which is considered in the following linked article.

There is time to review how borrowings are structured before these restrictions are phased in, but careful review will be needed of the final form of the legislation and how it is to apply where the borrowings do not wholly relate to residential property.

If you have any queries, please contact your usual consultant or Caroline Lovibond on 01865 261100 ([email protected])

1 August 2015