The Government has issued guidance and examples on the restriction of income tax relief for interest costs incurred by landlords of residential properties.

By Mark Jones, director of Carmarthen-based Clay Shaw Butler chartered accountants and business consultants.

The new rules, which are phased in from April 2017, only apply to residential properties and do not apply to companies or furnished holiday lettings.

From April 2017 income tax relief will start to be restricted to the basic rate of tax.

The restriction will be phased in over four years and therefore be fully in place by 2020/21.

In the first year the restriction will apply to 25% of the interest, then 50% the year after and 75% in the third.

The restriction may result in additional amounts of tax being due but will depend on the marginal rate of tax for the taxpayer.

Basic rate taxpayers should not be substantively affected by these rules.

A higher rate taxpayer will, in principle, get 20% less relief for finance costs.

However, the calculation method may mean that some taxpayers move into the higher rate tax brackets as the following example illustrates:

Consider the 2020/21 tax year when the transitional period is over. Assume that the personal allowance is £11,000, the basic rate band £32,000 and the higher rate band starts at £43,000.

Assume Ellisha has a salary of £28,000, rental income before interest of £23,000 and interest on the property mortgage of £8,000. Under the current tax rules, taxable rental income is £15,000. She will not pay higher rate tax as her total income is £43,000 – the point from which higher rate tax is payable.

With the new rules, taxable rental income is £23,000. So £8,000 is taxable at 40% – £3,200. Interest relief is given after having computed the tax liability on her income. The relief is £8,000 at 20% – £1,600. So an extra £1,600 tax is payable.

It should be noted that the tax reduction cannot be used to create a tax refund.

So the amount of interest relief is restricted where either total property income or total taxable income (excluding savings and dividend income) of the landlord is lower than the finance costs incurred.

The unrelieved interest is carried forward and may get tax relief in a later year.

Child benefit is clawed back if ‘adjusted net income’ is above £50,000. Interest will not be deductible in the calculation of ‘adjusted net income’.

The personal allowance is reduced if ‘adjusted net income’ is above £100,000.

Please contact us at Clay Shaw Butler if you would like advice on how these rules will affect you.

Meanwhile, the following Tax Events are due on 19th September 2016 – PAYE, Student loan and CIS deductions are due for month to 5th September 2016.

This deadline is relevant to employers who have made PAYE deductions from their employees’ salaries and to contractors who have paid subcontractors under the CIS.

Employers are required to make payment to HMRC of the income tax, national insurance and student loan deductions. Contractors are required to make payment to HMRC of the tax deductions made from subcontractors under the CIS.

Where the payment is made electronically the deadline for receipt of cleared payment is 22nd September 2016. In year interest will be charged if payment is made late. Penalties also apply.

You can find out more about money matters on the Clay Shaw Butler website (under our news for business section) –

http://www.clayshawbutler.com/news/latest-news-for-business

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