Net profits from residential property (after deducting allowable expenses) are liable to income tax at your marginal rate:
- For basic rate taxpayers 20%
- For higher rate taxpayers 40%
- For additional rate taxpayers 45%
The amount of tax relief for any finance costs is being restricted to the basic rate of tax. Meaning if you are a higher or additional rate tax payer with interest costs being incurred on let property your tax liability may be higher. This is being phased in gradually over 4 years from April 2017.
Finance costs will no longer be allowed as a deduction when computing taxable residential property profits. Instead once all your income has been assessed the finance costs will act as a tax reducer at 20%. Previously you would have got tax relief at your marginal rate.
Over the next four years you will be able to use some of the finance costs to deduct from your property profits, while some will be only used as a basic rate tax deduction. This is up until April 2020 when the basic rate tax deduction will be fully phased in.
| Â
Tax year |
Percentage of finance costs deductible from rental income | Percentage of basic rate tax reduction |
| 2017 to 2018 | 75% | 25% |
| 2018 to 2019 | 50% | 50% |
| 2019 to 2020 | 25% | 75% |
| 2020 to 2021 | 0% | 100% |
If your total income, including residential property profits with no deduction for finance costs, is still within the basic rate you will not be affected by these changes. Please note there are some restrictions when finance costs exceed rental profits. However if your total income exceeds the basic rate and is in higher or additional rates your tax liability will be affected in the future.
Example – Higher rate tax payer
Jake owns a mortgaged property that he lets out. He has a mortgage on the property and he claims interest on this as an expense against his rental income each year. Jake also has a job where he earns £49,000 a year. The interest on his mortgage is approximately £3,000 per year. Below is a table showing increase in his tax liability between now and 2020/21:
| Tax Year | Increase in Tax liability | |
| 2016/17 | £0 | |
| 2017/18 | £150 | |
| 2018/19 | £300 | |
| 2019/20 | £450 | |
| 2020/21 | £600 | |
Please contact us regarding the above if you would like any advice or if you want your personal circumstances evaluated to see how the changes affect you.
