After the outcome of the EU referendum left us with a new Prime Minister and a new Cabinet, a number of landlord groups urged the new setup to rethink the tax changes affecting landlords, which will begin to be phased in from next year.
However, it seems these calls didn’t have the desired effect as, towards the end of July, HM Revenue & Customs published the full details of the new system for the first time. We've taken a closer look at the Government's plans.
Key points confirmed:
What about incorporation?
As expected, the Government guidance confirms that the finance cost restriction won’t affect UK resident companies or non-UK resident companies.
This is good news for landlords who already own their properties through a limited company and provides further encouragement for those thinking about incorporation to do some more research.
A few months ago, we spoke to a landlord tax expert and he gave some helpful advice on incorporation and how it affects a landlord's tax return. You can read up on that here.
Is there anything we didn't know?
HM Revenue & Customs' guidance explains in more detail how the tax relief restriction will be implemented in the next four years.
Up until April 2020, landlords will still be able to deduct some of their costs from their taxable profits – however these deductions will reduce year-on-year until they’re completely replaced with a basic tax rate relief structure.
In the tax year 2017/2018, landlords will be able to deduct 75% of finance costs from their rental profits, with the remaining 25% coming under the basic rate tax reduction. The following tax year, 2018/2019, it moves to a 50/50 ratio.
In 2019/2020, landlords will only be able to deduct 25% of their finance costs from their rental income, with 75% coming under the tax reduction. By tax year 2020/2021, the basic rate tax reduction will have reached 100%.
Looking ahead to 2017
It's important to remember that, despite the furore surrounding these tax changes, they won't affect all landlords. If you don't already know if you'll be affected, now’s the time to find out.
April next year may still seem like a while away but landlords need to start preparing their portfolios for a new tax system, by doing the required research and seeking expert tax advice where necessary.
HM Revenue & Customs' full guidance post can be viewed here – it's well worth a read if you're not fully up to speed with what's been going on.