Interest relief for landlords – the next stage
The way in which landlords can obtain relief for interest payments and other finance costs is moving gradually from relief by deduction to relief as a basic rate tax reduction. Where the landlord pays tax at a rate above the basic rate, the value of that relief will gradually reduce.
The change is being phased in over four years. The process began in 2017/18 with a move from full relief as a deduction in calculating taxable profits to a hybrid situation whereby relief for 75% of the interest costs is given as a deduction in calculating taxable profits and the remaining 25% as a basic rate tax deduction. Landlords will need to use the new rules when working out their taxable profits for 2017/18.
The start of the 2018/19 tax year brings with it the next phase of the shift - for 2018/19, landlords will receive relief for 50% of their interest costs as a deduction and the remaining 50% as a basic rate reduction.
The following case study shows what impact this change has on a particular landlord.
Raj has two investment properties that he lets out. He also works in IT, earning a salary of £50,000. He pays tax on his rental profits at 40%.
In 2017/18 and 2018/19, his rental income is £25,000. He has interest costs of £10,000 and other expenses of £3,000.
In 2017/18, he can deduct £7,500 (75% of £10,000) in calculating his rental profit. Relief for the remaining £2,500 is given as basic rate tax reduction of £500 (£2,500 @ 20%).
In 2018/19, he can deduct £5,000 (50% of £10,000) in calculating his rental profit. Relief for the remaining £5,000 is given as a basic rate tax reduction of £1,000 (£5,000 @ 20%).
The tax payable for each year is calculated as follows
The profits retained by Raj for each year are as follows:
As a result of the shift, Raj gets to keep £500 less of his rental income in 2018/19 than in 2017/18, despite the fact that nothing has changed.
The shift continues in 2019/20. For that year, relief for 25% of interest costs will be given by deduction and the remaining 75% as a basic rate tax reduction. From 2020/21 onwards, relief will only be available as a basic rate tax deduction.