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Government releases details of incoming tax changes
Tags: Tax, Legislation

Government releases details of incoming tax changes

Posted on 2016-08-23

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:

  • Landlords of residential properties will have their tax relief restricted to the basic rate of income tax
  • The new system will be phased in between April 2017 and April 2020
  • Income tax liability will be reduced by a basic rate 'tax reduction' after the income tax on property profits has been assessed
  • The finance costs that will be restricted are interest on mortgages, loans and overdrafts as well as alternative finance returns
  • The system will affect anyone that lets a property in the UK, either individually or as part of a partnership or trust
  • It’ll also affect UK residents who let properties overseas
  • Landlords who let furnished holiday lettings won’t be affected by the tax changes

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.

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