HMRC are introducing new rules which will restrict the amount of tax relief available to landlords for finance costs relating to residential properties.
These changes do not extend to furnished holiday accommodation.
You will only be affected by these changes if you have a loan on your investment property.
So, what are finance costs?
This includes loan interest, as well as incidentals costs of arranging and repaying the loan.
For individuals, the amount of tax relief will be restricted to the basic rate of income tax (20%). The restriction will be phased in over 4 years, commencing April 2017.
Currently, finance costs are deducted from rental income, together with any other allowable property expenses. Following the change, finance costs will not be included when calculating the net rental income. Instead, the income tax liability will be calculated (including other sources of income) and a reduction will be made with reference to the basic rate value of the finance costs.
What if net rental income is less than the finance costs?
The tax reduction is not given against other sources of income. Excess finance costs can be carried forward against the calculation of the basic rate tax deduction in future years.
Confused?
Click here to see some examples and further information.