Final details on how buy to let landlords should calculate their income tax on rental profits from April 2017 have been published at last by HM Revenue and Customs (HMRC).
Landlords have waited months for the computations, which come as four worked examples from the tax authority.
From April 6, 2017, landlords face a restriction on claiming finance interest relief which will be phased in over three years.
The relief limits tax relief on finance costs, such as mortgage interest, to the level of basic income tax (20%), so landlords paying higher rate taxes (40%/45%) will see their relief slashed by 50% by April 2020.
Working out the tax reduction
The measure applies equally to expats and non-residential landlords with letting property in the UK, but not to companies renting out homes or holiday lets.
HMRC confirms finance interest relief tax reduction is worked out as the lowest of:
- Interest paid on mortgages, loans or other finance in the tax year
- Property business profits after deducting any brought forward losses
- Adjusted total income – the landlord’s income exceeding the personal allowance after taking away losses and reliefs, excluding savings and dividends
If the taking away the reduction leaves a negative tax payment for the landlord, the amount is adjusted to zero as no tax refund is claimable.
The tax change impacts individual landlords, partnerships and trusts.
Legal challenge
“Finance costs won’t be taken into account to work out taxable property profits. Instead, once income tax on property profits and any other income sources has been assessed, income tax liability will be reduced by a basic rate tax reduction. For most landlords, this’ll be the basic rate value of the finance costs,” says HMRC.
The new rules have provoked consternation among many landlords who fear they will not only pay more tax on property profits, but could pay tax on notional profits they have not banked.
A legal challenge was mounted at the High Court seeking a judicial review of the policy on the grounds the changes breached the human rights of landlords.
Led by barrister and former prime minister’s wife Cherie Blair, the bid was knocked back at the first hurdle leaving no further avenue for action open.
