Interest relief restriction is likely to increase tax liabilities and may impact on entitlements to child benefit and tax credits.
Starting from 6 April 2017, new rules are coming into force dealing with how individual landlords renting out residential property obtain relief for finance costs (e.g. mortgage interest). The transition will occur over the tax years 2017/18 to 2019/20 inclusive. Broadly speaking, the new rules mean that landlords will no longer be able to deduct all their finance costs from their gross property income before calculating their tax liability. Instead, they will have to work out their tax liability (without any deduction for finance costs) and then deduct an amount from their tax liability equal to 20 percent of their finance costs.
How will it impact taxpayers?
While this may sound like semantics it does in fact have some very real consequences:
In all cases however, and this is particularly relevant for the last group, the taxpayer is not economically better off even though their taxable income indicates otherwise. In fact most, if not all of them, will be worse off due to the increased tax liability.
What are the transitional rules?
As mentioned above, the new rules are being phased in from 2017/18 through to 2019/20 as follows:
of finance costs deductible from rental income
of basic rate tax reduction
As the table shows, each year the rules get closer and closer to their final state so every year between now and 2020/21 more taxpayers will be caught by the issues listed above.
Who is impacted?
The new rules only apply to individuals who own residential property. Landlords who own commercial properties or furnished holiday lettings are not affected, neither are companies holding residential property.
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