What’s happening?

Upcoming changes to tax relief for landlords may result in them paying higher rates of tax as HMRC publishes guidance on how the interest relief restrictions would work.

We saw the changes announced in the summer budget of 2015 and HMRC have now published further guidance. The rules looks to restrict the interest relief a residential landlord can claim to calculate their income tax liability. The restriction is being phased in over four years with interest being restricted by 25% in each year until it takes full effect in April 2020.

How could landlords be affected?

Currently, landlords of residential properties can deduct all interest from rental income to calculate taxable rental profit. When the new measures take full effect, the interest will be completely disallowed and instead a tax credit equal to 20% of the interest will be given against the person’s income tax liability.

 This could result in the individual having higher taxable income which could push them into a “higher” or “additional rate” of income tax. Furthermore, if individuals’ income exceeds £100,000 it could start to reduce their personal allowance, affect their entitlement to child benefit and restrict the amount on which they can claim tax relief for pensions.

 What can you do?

These measures are controversial to say the least and a judicial review by a coalition of private landlords is currently in progress.

In meantime, Shipleys Tax strongly recommends seeking professional advice to help mitigate the effects of the changes above and take action to manage your property portfolio tax efficiently a there currently a few solutions available.