The provisions of the much-discussed Section 24 of the Finance Act kicked in in April 2017, and will be implemented in phases over a four year period up to 2021.
All private landlords who receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding furnished holiday letting, will be affected.
The provisions of the Act are intended to restrict relief for finance costs on residential properties to the basic rate of income tax only and this will be introduced gradually from 6 April 2017. The hardest-hit will be higher rate (40%) tax-payers.
The finance costs in question include mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. Instead, they will just receive a basic rate reduction from their income tax liability for their finance costs.
The changes are being phased in over the next four years, and the government guides sets out the timetable for the relief for buy-to-let landlords as follows:
- in 2017 to 2018 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
- in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
The stated aim is to make the tax system fairer. By restricting the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax, this will ensure that landlords with higher incomes no longer receive the most generous tax treatment. The phasing in over four years is intended to give landlords time to adjust to the new system.
Other previously-allowed expenses will also be phased out over the four-year period. Before 2016 the following expenses were allowed:
- Mortgage interest
- Loans against buy-to-let property
- Broker fees
- Advertising/letting agent fees
- Wear and tear allowance
- Running costs
After 2021 the only expenses that will be allowed are advertising/letting agent costs and general running costs.
Buy-to-let landlords have some time to gear themselves up for the full changes, so it might be worthwhile joining a landlords association to obtain advice and mutual aid from others affected by these changes. Landlord could also think about discussing their own position with an accountant who will be able to explain the changes in detail and give an indication of the increase in the tax bill and what options may be available in order to minimise it!
The Telegraph has published a buy-to-let calculator that helps demonstrate how new changes to the tax might reduce profits
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