Major change to taxation of
Institute of Taxation (CIOT) is reminding landlords of residential properties
that the 1st Phase of the restriction of Tax Relief they get for mortgage
interest to the basic rate of Income Tax, begins in April.
The change means that finance costs such as mortgage interest will no longer be
able to be deducted in full to work out taxable property profits. All individual
residential landlords with finance costs will be affected.
The restriction works by disallowing finance costs in calculating the taxable
rental profit, and then introducing a Tax Credit, that is equal to 20% of the disallowed
Brian Slater, Chair of CIOT's Property Taxes Sub Committee, said:- "This
is one of the most significant changes to the buy to let market in decades and
will particularly affect heavily geared buy to let landlords. However, it is
sensible for landlords to be cautious about making any knee jerk moves in
response to the changes.
A decision to sell properties may be tempting for those that are highly geared,
meaning they are carrying a lot of debt from perhaps buying many properties or a
couple of expensive ones and can no longer benefit from the relief.
Helpfully the change is being phased in over 4 Tax years, so that the full
effect of the restriction will not be felt until Tax year 2020 to 2021. This will
give landlords extra time to consider their options.
Taxpayers may have to decide whether to continue in buy to lets with reduced
profits or simply sell their properties, which may impact on the number of
houses and flats available to buy. Or such people could move into commercial
property renting, but they will find that to be a more specialised field.
The restrictions apply to individual landlords and not to companies, which will
continue to receive relief for mortgage interest and other finance costs in the
usual way. This means that the change may impact on the look of the rental
landscape in the future if many individual landlords choose to incorporate and
become companies, although this is not without difficulty and incorporation
itself can involve Tax charges; these may be Stamp Duty Land Tax on the market
value of properties and possible Capital Gains Tax on properties transferred
into a company."