Restricting finance cost relief for individual landlords
Who is likely to be affected
Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting.
General description of the measure
This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6 April 2017.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
- in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
To make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years.
Background to the measure
This measure was announced in Summer Budget 2015.
This measure will have effect for finance costs incurred on or after 6 April 2017.
Current law on how to calculate the profits of a property business is included in Chapter 3 of Part 3 Income Tax (Trading and Other Income) Act 2005.
Legislation will be published in Summer Finance Bill 2015 to restrict deductions from property income for finance costs for residential properties for individuals and to introduce a tax reduction at the basic rate of Income Tax.
Deductions from property income will be restricted to:
- 75% for 2017 to 2018
- 50% for 2018 to 2019
- 25% for 2019 to 2020
- 0% for 2020 to 2021 and beyond
Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of the:
- finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
- profits of the property business in the tax year
- total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year
Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
Summary of impacts
Exchequer impact (£m)
These figures are set out in Table 2.1 of Summer Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Summer Budget 2015.
This measure could marginally reduce demand for housing but it is not expected to have a significant impact on either house prices or rent levels due to the small overall proportion of the housing market affected and the offsetting impact of wider budget measures. The costing includes a behavioural response from the impacted population having relief for finance costs restricted to the basic rate of Income Tax.
Impact on individuals, households and families
It is expected that 1 in 5 individual landlords will receive less relief as a result of this measure. Administratively this measure will affect individuals (including partners in partnerships) with income from residential property that incur finance costs. It is also expected that both the one-off and on-going administrative burdens for these individuals will be negligible as the majority will still only need to complete one box for finance costs on the self-assessment return and the new tax calculation will be automated for those filing online. For those filing a paper return, we expect a tax calculator to be available. There will be an additional administrative burden for individuals with rental income from both commercial and residential properties as they will need to complete an additional box as a result of the measure.
The measure is not expected to impact on family formation, stability or breakdown.
It is likely that this measure will impact on those with above average incomes. It is not anticipated that the measure will adversely impact on any particular protected characteristic group.
There are no other expected impacts on the equality of groups sharing protected characteristics.
Impact on business including civil society organisations
The impact on individuals is explained above. There is no additional impact on business.
This measure is expected to have no impact on civil society organisations.
Operational impact (£m) (HM Revenue and Customs (HMRC ) or other)
The additional costs for HMRC for implementing this change are estimated to be in the region of £420,000 for the IT changes and £150,000 for customer information and support. Compliance will be carried out in accordance with HMRC ‘s compliance strategy, with an indicative cost of around £500,000 – £1 million for resource, training and guidance.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns.